CONSOLIDATED FINANCIAL STATEMENTS
SUPPLEMENTARY INFORMATION
The Cleveland Clinic Foundation
d.b.a. Cleveland Clinic Health System
Years Ended December 31, 2016 and 2015
With Report of Independent Auditors
Ernst & Young LLP
AND
Cleveland Clinic Health System
Consolidated Financial Statements
and Supplementary Information
Years Ended December 31, 2016 and 2015
Contents
Report of Independent Auditors .......................................................................................................1
Consolidated Financial Statements
Consolidated Balance Sheets ...........................................................................................................2
Consolidated Statements of Operations and Changes in Net Assets ...............................................4
Consolidated Statements of Cash Flows ..........................................................................................6
Notes to Consolidated Financial Statements....................................................................................7
Supplementary Information
Report of Independent Auditors on Supplementary Information ..................................................61
Consolidating Balance Sheets ........................................................................................................62
Consolidating Statements of Operations and Changes in Net Assets ............................................66
Consolidating Statements of Cash Flows ......................................................................................69
Note to Consolidating Financial Statements ..................................................................................71
1612-2136592
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Report of Independent Auditors
The Board of Directors
The Cleveland Clinic Foundation
We have audited the accompanying consolidated financial statements of The Cleveland Clinic Foundation
and controlled affiliates, d.b.a. Cleveland Clinic Health System, which comprise the consolidated balance
sheets as of December 31, 2016 and 2015, and the related consolidated statements of operations and
changes in net assets, and cash flows for the years then ended, and the related notes to the consolidated
financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in
conformity with U.S. generally accepted accounting principles; this includes the design, implementation,
and maintenance of internal control relevant to the preparation and fair presentation of financial statements
that are free of material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these financial statements based on our audits. We conducted
our audits in accordance with auditing standards generally accepted in the United States. Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the
financial statements. The procedures selected depend on the auditor’s judgment, including the assessment
of the risks of material misstatement of the financial statements, whether due to fraud or error. In making
those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair
presentation of the financial statements in order to design audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal
control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of
accounting policies used and the reasonableness of significant accounting estimates made by management,
as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our
audit opinion.
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the
consolidated financial position of The Cleveland Clinic Foundation and controlled affiliates, d.b.a.
Cleveland Clinic Health System, at December 31, 2016 and 2015, and the consolidated results of their
operations and their cash flows for the years then ended in conformity with U.S. generally accepted
accounting principles.

March 21, 2017
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A member firm of Ernst & Young Global Limited
1
Cleveland Clinic Health System
Consolidated Balance Sheets
(In Thousands)
December 31
2016
2015
Assets
Current assets:
Cash and cash equivalents
Patient receivables, net of allowances for uncollectible
accounts of $186,241 in 2016 and $213,516 in 2015
Investments for current use
Other current assets
Total current assets
Investments:
Long-term investments
Funds held by trustees
Assets held for self-insurance
Donor-restricted assets
Property, plant, and equipment, net
Other assets:
Pledges receivable, net
Trusts and interests in foundations
Other noncurrent assets
Total assets
2
$
520,628
$
249,580
1,059,171
52,126
396,892
2,028,817
950,304
53,852
408,139
1,661,875
6,476,259
75,892
128,128
612,221
7,292,500
6,184,378
125,723
93,662
565,161
6,968,924
4,512,078
4,388,667
150,709
67,219
410,007
627,935
141,468
86,741
353,751
581,960
$ 14,461,330 $ 13,601,426
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December 31
2016
2015
Liabilities and net assets
Current liabilities:
Accounts payable
Compensation and amounts withheld from payroll
Current portion of long-term debt
Variable rate debt classified as current
Other current liabilities
Total current liabilities
Long-term debt:
Hospital revenue bonds
Notes payable and capital leases
Other liabilities:
Professional and general liability insurance reserves
Accrued retirement benefits
Other noncurrent liabilities
Total liabilities
Net assets:
Unrestricted
Temporarily restricted
Permanently restricted
Total net assets
Total liabilities and net assets
$
482,427
322,493
81,739
527,115
462,561
1,876,335
$
412,559
295,668
95,694
519,252
467,042
1,790,215
2,926,949
516,719
3,443,668
2,727,471
466,020
3,193,491
146,109
478,874
490,545
1,115,528
6,435,531
139,617
490,753
478,352
1,108,722
6,092,428
6,627,406
7,088,209
586,276
627,426
295,316
310,164
7,508,998
8,025,799
$ 14,461,330 $ 13,601,426
See accompanying notes.
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3
Cleveland Clinic Health System
Consolidated Statements of Operations
and Changes in Net Assets
(In Thousands)
Operations
Year Ended December 31
2016
2015
Unrestricted revenues
Net patient service revenue
Provision for uncollectible accounts
Net patient service revenue less provision
for uncollectible accounts
Other
Total unrestricted revenues
$ 7,551,066 $ 6,712,483
(231,304)
(301,694)
7,249,372
787,835
8,037,207
6,481,179
675,793
7,156,972
4,534,869
749,073
862,697
506,107
196,958
343,377
66,746
7,259,827
3,799,214
664,846
701,236
398,378
175,834
300,652
62,067
6,102,227
Operating income before interest, depreciation,
and amortization expenses
777,380
1,054,745
Interest
Depreciation and amortization
Operating income before special charges
136,105
476,305
164,970
124,141
409,453
521,151
Special charges – Note 20
Operating income
25,618
139,352
40,927
480,224
Nonoperating gains and losses
Investment return
Derivative losses
Gain on remeasurement of Akron General equity investment
Akron General member substitution contribution
Goodwill impairment loss
Other, net
Net nonoperating gains
Excess of revenues over expenses
404,191
(22,824)
–
–
–
(7,212)
374,155
513,507
(56,328)
(25,010)
38,777
242,822
(63,060)
793
137,994
618,218
Expenses
Salaries, wages, and benefits
Supplies
Pharmaceuticals
Purchased services and other fees
Administrative services
Facilities
Insurance
(continued on next page)
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4
Changes in Net Assets
Net Assets
Temporarily Permanently
Unrestricted Restricted Restricted
Balances at January 1, 2015
Excess of revenues over expenses
Donated capital and assets released from
restrictions for capital purposes
Gifts and bequests
Net investment loss
Net assets released from restrictions used for
operations included in other unrestricted revenues
Retirement benefits adjustment
Change in interests in foundations
Change in value of perpetual trusts
Net change in unrealized losses on
nontrading investments
Akron General member substitution contribution
Other
Increase in net assets
Balances at December 31, 2015
Excess of revenues over expenses
Donated capital and assets released from
restrictions for capital purposes
Gifts and bequests
Net investment income
Net assets released from restrictions used for
operations included in other unrestricted revenues
Retirement benefits adjustment
Change in interests in foundations
Change in value of perpetual trusts
Foreign currency translation loss
Net change in unrealized gains on
nontrading investments
Other
Increase in net assets
Balances at December 31, 2016
$ 5,998,053
618,218
$ 519,730
–
Total
$ 284,712
–
$ 6,802,495
618,218
5,806
–
–
(5,760)
107,982
(732)
–
24,639
–
46
132,621
(732)
–
21,747
–
–
(44,493)
–
(17,351)
–
–
–
(17,480)
(676)
(44,493)
21,747
(34,831)
(676)
–
27,553
(653)
66,546
586,276
–
–
4,121
–
10,604
295,316
–
(4,947)
31,674
(12,124)
706,503
7,508,998
513,507
23,448
–
–
(22,683)
84,256
24,451
–
16,939
–
765
101,195
24,451
–
(17,789)
–
–
(59,181)
(45,292)
–
432
–
–
–
–
–
(2,091)
–
(45,292)
(17,789)
432
(2,091)
(59,181)
(4,947)
–
(11,471)
629,353
6,627,406
513,507
320
498
460,803
$ 7,088,209
–
–
(14)
–
41,150
14,848
$ 627,426 $ 310,164
320
484
516,801
$ 8,025,799
See accompanying notes.
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Cleveland Clinic Health System
Consolidated Statements of Cash Flows
(In Thousands)
Year Ended December 31
2016
2015
Operating activities and net nonoperating gains and losses
Increase in net assets
Adjustments to reconcile increase in net assets to net cash provided by
operating activities and net nonoperating gains and losses:
Loss on extinguishment of debt
Retirement benefits adjustment
Net realized and unrealized (gains) losses on investments
Depreciation and amortization
Provision for uncollectible accounts
Foreign currency translation loss
Gain on change in terms of long-term lease
Donated capital
Restricted gifts, bequests, investment income, and other
Amortization of bond premiums and debt issuance costs
Net gain in value of derivatives
Goodwill impairment loss
Gain on remeasurement of Akron General equity investment
Akron General member substitution contribution
Changes in operating assets and liabilities:
Patient receivables
Other current assets
Other noncurrent assets
Accounts payable and other current liabilities
Other liabilities
Net cash provided by operating activities and net
nonoperating gains and losses
$
Financing activities
Proceeds from long-term borrowings
Payments for advance refunding and redemption of long-term debt
Principal payments on long-term debt
Debt issuance costs
Change in pledges receivable, trusts, and interests in foundations
Restricted gifts, bequests, investment income, and other
Net cash provided by financing activities
Investing activities
Expenditures for property and equipment
Proceeds from sale of property and equipment
Cash acquired through member substitution
Acquisition of business, net of cash acquired
Net change in cash equivalents reported in long-term investments
Purchases of investments
Sales of investments
Net cash used in investing activities
Effect of exchange rate changes on cash
Increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
$
Supplemental disclosure of noncash activity
Assets acquired through capital leases
$
516,801
$
706,503
3,925
17,789
(382,146)
491,292
301,694
59,181
–
(765)
(123,987)
(1,657)
(8,835)
–
–
–
209
(21,747)
97,816
418,890
231,304
–
(6,856)
(46)
(96,382)
(2,552)
(558)
63,060
(38,777)
(274,496)
(410,561)
31,113
(58,559)
91,924
8,928
(299,939)
(48,770)
(77,581)
35,818
(3,495)
536,137
682,401
502,448
(148,260)
(127,011)
(949)
(10,203)
123,987
340,012
375,000
–
(71,073)
(89)
63,560
96,382
463,780
(664,703)
1,585
–
–
146,064
(2,757,671)
2,671,903
(602,822)
(453,536)
1,170
15,367
(420,144)
305,575
(2,828,674)
2,413,319
(966,923)
(2,279)
271,048
249,580
520,628 $
–
179,258
70,322
249,580
$
17,333
15,479
See accompanying notes.
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Cleveland Clinic Health System
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
1. Organization and Consolidation
The Cleveland Clinic Foundation (Foundation) is a nonprofit, tax-exempt, Ohio corporation
organized and operated to provide medical and hospital care, medical research, and education.
The accompanying consolidated financial statements include the accounts of the Foundation and
its controlled affiliates, d.b.a. Cleveland Clinic Health System (System).
The System is the leading provider of healthcare services in northeast Ohio. The System operates
14 hospitals with approximately 3,900 staffed beds. Thirteen of the hospitals are operated in the
Northeast Ohio area, anchored by the Foundation. The System operates 21 outpatient Family
Health Centers, 10 ambulatory surgery centers, as well as numerous physician offices located
throughout a seven-county area of northeast Ohio, and specialized cancer centers in Sandusky and
Mansfield, Ohio. In addition, the System operates a hospital and a clinic in Weston, Florida, health
and wellness centers in West Palm Beach, Florida and Toronto, Canada, and a specialized
neurological clinical center in Las Vegas, Nevada. Pursuant to agreements, the System also
provides management services for Ashtabula County Medical Center, located in Ashtabula, Ohio,
with approximately 180 staffed beds, Cleveland Clinic Abu Dhabi, a multispecialty hospital
offering critical and acute care services that is part of Mubadala Development Company’s network
of healthcare facilities located in Abu Dhabi, United Arab Emirates with approximately 250 staffed
beds, and in cooperation with Abu Dhabi Health Services Company, the Sheikh Khalifa Medical
City, a network of healthcare facilities in Abu Dhabi, United Arab Emirates with approximately
711 staffed beds.
In November 2015, the Foundation became the sole member of Akron General Health System
(Akron General), an integrated healthcare delivery system with a 532-registered bed flagship
medical center located in Akron, Ohio. In addition to the flagship medical center, Akron General
also includes Lodi Community Hospital, Edwin Shaw Rehabilitation Institute, three health and
wellness centers, Visiting Nurse Services and affiliates, a physician group practice and other
outpatient locations. The System previously had a 35% special membership interest in Akron
General pursuant to an affiliation agreement as further described in Note 2.
All significant intercompany balances and transactions have been eliminated in consolidation.
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Cleveland Clinic Health System
Notes to Consolidated Financial Statements (continued)
2. Business Combinations
Effective November 1, 2015, the Foundation became the sole member of Akron General through
a non-cash business combination transaction. The business combination was recorded under the
acquisition method of accounting. Prior to November 1, 2015, the Foundation was a minority
member in Akron General with limited reserve powers pursuant to an affiliation agreement that
was effective in September 2014. The affiliation agreement provided for a $100 million capital
investment, comprised of $10 million cash and $90 million note payable, in Akron General in
exchange for a 35% special membership interest.
The Foundation’s investment in Akron General was $147.8 million at October 31, 2015, which
was recorded under the equity method of accounting. The Foundation recorded $5.5 million in
equity earnings in 2015 prior to the business combination transaction. Equity earnings on the
Foundation’s investment in Akron General are recorded in other unrestricted revenues in the
consolidated statements of operations and changes in net assets.
On October 31, 2015, immediately prior to the business combination transaction, the investment
in Akron General was remeasured to fair value using a combination of techniques consistent with
the income and market approaches. As a result of this remeasurement, the System recorded a
$38.8 million gain on remeasurement of the 35% equity investment, which is reported in
nonoperating gains and losses in the consolidated statement of operations and changes in net assets
for the year ended December 31, 2015. The Foundation’s investment in Akron General of
$147.8 million was derecognized on November 1, 2015 in conjunction with the accounting for the
business combination transaction.
The fair value of Akron General’s net assets as of November 1, 2015 by major type is as follows
(in thousands):
Net working capital
Intangible assets
Property and equipment
Investments
Other assets
Noncurrent liabilities assumed
Subtotal
Less October 31, 2015 investment in Akron General
Fair value of net assets
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$
$
29,869
32,280
330,176
215,966
92,106
(278,096)
422,301
(147,805)
274,496
8
Cleveland Clinic Health System
Notes to Consolidated Financial Statements (continued)
2. Business Combinations (continued)
The fair value of net assets of $274.5 million in the preceding table was recognized in the
consolidated statement of operations and changes in net assets for the year ended December 31,
2015 as a nonoperating member substitution contribution of $242.8 million, contributions of
temporarily restricted net assets of $27.6 million and contributions of permanently restricted net
assets of $4.1 million.
The results of operations for Akron General are included in the consolidated statements of
operations and changes in net assets beginning on November 1, 2015. For the two months ended
December 31, 2015, Akron General had total unrestricted revenues of $121.8 million, operating
income of $5.9 million and an excess of revenues over expenses of $4.1 million. Additionally, for
the two months ended December 31, 2015, Akron General recognized an increase in unrestricted
net assets of $1.1 million, including excess of revenues over expenses of $4.1 million, and a
decrease in temporarily and permanently restricted net assets of $1.0 million.
On October 13, 2015, the Foundation through its subsidiary purchased all of the share capital of
33 Grosvenor Place Limited (Grosvenor Place) for approximately $424.8 million, including net
working capital. Grosvenor Place is a limited liability company existing under Luxembourg law
and a private company incorporated under Jersey law that has a long-term leasehold interest in a
six-story 198,000 square-foot building in London, England. Upon acquisition, Grosvenor Place
currently leased office space to various tenants. The Foundation has established a plan to convert
the building to a healthcare facility. The business combination was recorded under the acquisition
method of accounting. Purchase price amounts have been assigned to assets acquired and liabilities
assumed based on their respective fair values. The excess of the purchase price over the fair value
of acquired net assets has been recorded as goodwill.
The fair value of Grosvenor Place’s net assets as of October 13, 2015 by major type is as follows
(in thousands):
Net working capital
Goodwill
Property
Fair value of net assets
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$
$
2,833
63,060
358,875
424,768
9
Cleveland Clinic Health System
Notes to Consolidated Financial Statements (continued)
2. Business Combinations (continued)
The results of operations for Grosvenor Place are included in the consolidated statements of
operations and changes in net assets beginning on October 13, 2015. From October 13, 2015
through December 31, 2015, Grosvenor Place had total unrestricted revenues of $3.9 million,
operating income of $0.1 million and a deficiency of revenues over expenses of $63.0 million.
The operations of Grosvenor Place had no impact on temporarily and permanently restricted net
assets.
The following unaudited pro forma financial information presents the combined results of
operations and changes in net assets of the System, Akron General and Grosvenor Place for the
year ended December 31, 2015, as though the business combination transactions had occurred on
January 1, 2015 (in thousands):
Total unrestricted revenues
Total unrestricted expenses
Operating income
Nonoperating gains and losses
Excess of revenues over expenses
Increase in unrestricted net assets
Increase in temporarily restricted net assets
Increase in permanently restricted net assets
$ 7,734,115
7,242,571
491,544
(80,814)
410,730
426,459
38,922
6,547
This pro forma financial information is not necessarily indicative of the results of operations and
changes in net assets that would have occurred had the System, Akron General and Grosvenor
Place constituted a single entity during this period, nor is it necessarily indicative of future
operating results and changes in net assets.
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Cleveland Clinic Health System
Notes to Consolidated Financial Statements (continued)
2. Business Combinations (continued)
The pro forma financial information in the table above includes certain adjustments attributable to
the Akron General and Grosvenor Place business combination transactions. The nonoperating
gains and losses, excess of revenues over expenses and the increase in unrestricted net assets for
the year ended December 31, 2015 in the table above excludes the gain on remeasurement,
unrestricted member substitution contribution and impairment loss of $38.8 million,
$242.8 million and $63.1 million, respectively, that were reflected in the consolidated statement
of operations and changes in net assets for the year ended December 31, 2015. In addition, the
increases in temporarily restricted net assets and permanently restricted net assets for the year
ended December 31, 2015 in the table above exclude the member substitution contributions of
$27.6 million and $4.1 million, respectively, that were reflected in the consolidated statement of
operations and changes in net assets for the year ended December 31, 2015.
3. Accounting Policies
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards
Update (ASU) 2014-09, Revenue from Contracts with Customers, which outlines a single
comprehensive model for entities to use in accounting for revenue arising from contracts with
customers and supersedes most current revenue recognition guidance, including industry-specific
guidance, and requires significantly expanded disclosures about revenue recognition. The core
principle of the revenue model is that an entity recognizes revenue to depict the transfer of
promised goods or services to customers in an amount that reflects the consideration to which the
entity expects to be entitled in exchange for those goods or services. The guidance in ASU 201409, including subsequent amendments, is effective for the System as of January 1, 2018.
The System is currently evaluating the impact on the consolidated financial statements and the
options of adopting using either a full retrospective or a modified approach.
In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity’s
Ability to Continue as a Going Concern, which requires an entity’s management to evaluate
whether there are conditions or events, considered in the aggregate, that raise substantial doubt
about the entity’s ability to continue as a going concern within one year after the date that the
financial statements are issued. This update is effective for annual periods ending after
December 15, 2016. The System adopted ASU 2014-15 in 2016. The adoption of this standard had
no impact on the consolidated financial statements.
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Cleveland Clinic Health System
Notes to Consolidated Financial Statements (continued)
3. Accounting Policies (continued)
In April 2015, the FASB issued ASU 2015-03, Imputation of Interest, Simplifying the Presentation
of Debt Issuance Costs. This ASU requires debt issuance costs to be presented in the balance sheet
as a direct deduction from the associated debt liability, consistent with the presentation of a debt
discount. This amends current guidance that requires debt issuance costs to be presented as assets
on the balance sheet. ASU 2015-03 is effective for the System for reporting periods beginning
after December 15, 2015. The System adopted ASU 2015-03 in 2016 and applied the new guidance
retrospectively to all periods presented in the consolidated financial statements. The System has
$23.2 million of debt issuance costs at both December 31, 2016 and 2015, respectively, that have
been reclassified under the new guidance.
In February 2016, the FASB issued ASU 2016-02, Leases. This ASU requires lessees to recognize
assets and liabilities on the balance sheet for leases with lease terms greater than twelve months.
The recognition, measurement and presentation of expenses and cash flows arising from a lease
by a lessee primarily will depend on its classification as a finance or operating lease. This amends
current guidance that requires only capital leases to be recognized on the lessee balance sheet.
ASU 2016-02 will also require additional disclosures on the amount, timing and uncertainty of
cash flows arising from leases. The guidance is effective for the System for reporting periods
beginning after December 15, 2018 with early adoption permitted. The System is currently
evaluating the impact that ASU 2016-02 will have on its consolidated financial statements and will
adopt the provisions upon the effective date.
In August 2016, the FASB issued ASU 2016-14, Presentation of Financial Statements for Not-forProfit Entities. This standard intends to make certain improvements to the current reporting
requirements for not-for-profit entities. This standard sets forth changes to net asset classification
requirements and the information presented about a not-for-profit entity’s liquidity, financial
performance and cash flows. ASU 2016-14 is effective for the System for reporting periods
beginning after December 15, 2017. The System is currently evaluating the impact that ASU 201614 will have on its financial statements and will adopt the provisions upon the effective date.
In March 2017, the FASB issued ASU 2017-07, Compensation – Retirement Benefits (Topic 715):
Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit
Cost. This ASU requires the service cost component of net periodic benefit cost related to defined
benefit pension and postretirement benefit plans to be reported in the same financial statement line
as other compensation costs arising from services rendered during the period. The other
components of net periodic benefit cost are required to be presented separately from service costs
and outside of operating income in the statement of operations. Only the service cost component
of net periodic benefit cost will be eligible for capitalization in assets. ASU 2017-07 is effective
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Cleveland Clinic Health System
Notes to Consolidated Financial Statements (continued)
3. Accounting Policies (continued)
for the System for annual reporting periods beginning after December 15, 2018 and interim periods
within annual reporting periods beginning after December 15, 2019 with early adoption permitted
in the first quarter of 2017. Upon adoption, the System is required to apply the new guidance
retrospectively to all periods presented in the consolidated financial statements, except for the
guidance limiting the capitalization of net periodic benefit costs in assets which is required to be
applied prospectively. The System will adopt the provisions of ASU 2017-07 in the first quarter
of 2017. The impact of adopting ASU 2017-07 for the System when applied retrospectively to the
year ended December 31, 2016 will decrease salaries, wages and benefits on the consolidated
statement of operations as presented herein by $103.9 million, with a corresponding increase to
operating income and decrease to net nonoperating gains. As a result, for the year ended
December 31, 2016 operating income will be $243.2 million and net nonoperating gains will be
$270.3 million upon retrospective adoption of ASU 2017-07. The adoption of ASU 2017-07 will
have no impact on excess of revenues over expenses or net assets.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements. Estimates also affect the reported
amounts of revenue and expenses during the reporting period. Actual results could differ from
those estimates.
Net Patient Service Revenue and Patient Receivables
Net patient service revenue is reported at the estimated net realizable amounts from patients,
third-party payors, and others, including retroactive adjustments under payment agreements with
third-party payors. The System has agreements with third-party payors that generally provide for
payments to the System at amounts different from its established rates. For uninsured patients who
do not qualify for charity care, the System recognizes revenue based on established rates, subject
to certain discounts as determined by the System. An estimated provision for uncollectible
accounts is recorded that results in net patient service revenue being reported at the net amount
expected to be received. The System has determined, based on an assessment at the consolidated
entity level, that patient service revenue is primarily recorded prior to assessing the patient’s ability
to pay and as such, the entire provision for uncollectible accounts related to patient service revenue
is recorded as a deduction from patient service revenue.
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Cleveland Clinic Health System
Notes to Consolidated Financial Statements (continued)
3. Accounting Policies (continued)
The System is paid a prospectively determined rate for the majority of inpatient acute care and
outpatient, skilled nursing, and rehabilitation services provided (principally Medicare, Medicaid,
and certain insurers). These rates vary according to a patient classification system that is based on
clinical, diagnostic, and other factors. Payments for capital are received on a prospective basis for
Medicare and on a cost reimbursement methodology for Medicaid. Payments are received on a
prospective basis for the System’s medical education costs, subject to certain limits. The System
is paid for cost reimbursable items at a tentative rate, with final settlement determined after
submission of annual cost reports by the System and audits thereof by the Medicare Administrative
Contractor. Provision for estimated retroactive adjustments, if any, resulting from regulatory
matters or other adjustments under payment agreements are estimated in the period the related
services are provided. The System recorded an increase in net patient service revenue of
$12.0 million and $24.0 million in 2016 and 2015, respectively, related to changes in estimates.
In 2014, the Provider Reimbursement Review Board provided a favorable decision to the System
regarding the graduate medical education program for Weston Hospital. The decision requires the
Centers for Medicare and Medicaid Services (CMS) to reimburse Weston Hospital on its annual
cost reports for graduate medical education under new program regulations, which includes all
years since the hospital opened in 2001. The System recorded an increase in net patient service
revenue of $7.5 million and $3.2 million in 2016 and 2015, respectively, related to changes in
estimates.
Laws and regulations governing the Medicare and Medicaid programs are complex and subject to
interpretation as well as significant regulatory action, and, in the normal course of business, the
System is subject to contractual reviews and audits, including audits initiated by the Medicare
Recovery Audit Contractor program. As a result, there is at least a reasonable possibility that
recorded estimates will change in the near term. The System believes it is in compliance with
applicable laws and regulations governing the Medicare and Medicaid programs and that adequate
provisions have been made for any adjustments that may result from final settlements.
As part of integration efforts involving Akron General and through review of contractual
relationships between Akron General and some of its independent physician practice groups, the
System identified possible violations to the Federal Anti-Kickback Statute and Limitations on
Certain Physician Referrals regulation (commonly referred to as the “Stark Law”), which may
have resulted in false claims to federal and/or state health care programs and may result in liability
under the False Claims Act. Akron General is cooperating with the appropriate government
authorities on such possible violations.
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Cleveland Clinic Health System
Notes to Consolidated Financial Statements (continued)
3. Accounting Policies (continued)
There is a probable liability associated with the matters described above, which may put at risk
federal reimbursements related to services provided to patients at Akron General by the practice
groups, and potential fines and penalties that could be assessed. It is not possible to estimate the
amount of the liability at this time and therefore no amount has been recognized in the consolidated
financial statements.
Patient receivables are reduced by an allowance for uncollectible accounts. The allowance for
uncollectible accounts is based upon management’s assessment of historical and expected net
collections considering historical business and economic conditions, trends in healthcare coverage,
major payor sources and other collection indicators. Periodically throughout the year, management
assesses the adequacy of the allowance for uncollectible accounts based upon historical write-off
experience by payor category. The results of this review are then used to make modifications to
the provision for uncollectible accounts to establish an appropriate allowance for uncollectible
receivables. After satisfaction of amounts due from insurance, the System follows established
guidelines for placing certain past-due patient balances with collection agencies, subject to the
terms of certain restrictions on collection efforts as determined by the System.
Electronic Health Record Incentive Program
CMS implemented provisions of the American Recovery and Reinvestment Act of 2009 that
provide annual incentive payments for the meaningful use of certified electronic health record
(EHR) technology. CMS has defined meaningful use as meeting certain objectives and clinical
quality measures based on current and updated technology capabilities over predetermined
reporting periods as established by CMS. The objectives and clinical quality measures are
implemented in stages with increasing requirements for participation. The Medicare EHR
incentive program provides annual incentive payments to eligible professionals and eligible
hospitals, as defined, that are meaningful users of certified EHR technology. The Medicaid EHR
incentive program provides annual incentive payments to eligible professionals and hospitals for
efforts to adopt, implement, and meaningfully use certified EHR technology in the first year of
participation and successfully demonstrating meaningful use of certified EHR technology in
subsequent participation years. Incentive payments are subject to retrospective adjustments after
the submission of the annual cost reports by the System and audits thereof by the Medicare
administrative contractor.
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Cleveland Clinic Health System
Notes to Consolidated Financial Statements (continued)
3. Accounting Policies (continued)
The System utilizes a grant accounting model to recognize EHR incentive revenues. The System
records EHR incentive revenue ratably throughout the incentive reporting period when it is
reasonably assured that it will meet the meaningful use objectives for the required reporting period
and that the grants will be received. Beginning in 2015, CMS updated the EHR incentive reporting
period for all hospitals to be based on the calendar year. The System believes that the professionals
and hospitals that met meaningful use objectives for 2015, and that are eligible for EHR incentive
payments in the 2016 program year, will continue to meet these objectives for the 2016 program
year. Therefore, for the year ended December 31, 2016, the System has accrued EHR revenues
related to the EHR reporting period in 2016. In 2016, the System recorded EHR incentive revenues
of $4.3 million, comprised of $3.0 million of Medicare revenues and $1.3 million of Medicaid
revenues. In 2015, the System recorded EHR incentive revenues of $7.0 million, comprised of
$5.7 million of Medicare revenues and $1.3 million of Medicaid revenues. EHR incentive
revenues are included in other unrestricted revenues in the consolidated statements of operations
and changes in net assets.
Charity Care
The System provides care to patients who do not have the ability to pay and who qualify for charity
care pursuant to established policies of the System. Charity care is defined as services for which
patients have the obligation and willingness to pay but do not have the ability to do so. The System
does not report charity care as net patient service revenue. The cost of charity care provided in
2016 and 2015 approximated $87 million and $65 million, respectively. The System estimated
these costs by calculating a ratio of cost to gross charges and then multiplying that ratio by the
gross uncompensated charges associated with providing care to charity patients.
The System participates in the Hospital Care Assurance Program (HCAP). Ohio created HCAP to
financially support those hospitals that service a disproportionate share of low-income patients
unable to pay for care. HCAP funds basic, medically necessary hospital services for patients whose
family income is at or below the federal poverty level, which includes Medicaid patients and
patients without health insurance. The System recorded HCAP revenues of $3.1 million and
$9.3 million for the years ended December 31, 2016 and 2015, respectively, which are included in
net patient service revenue.
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Cleveland Clinic Health System
Notes to Consolidated Financial Statements (continued)
3. Accounting Policies (continued)
Management Service Agreements
The System has management service agreements with regional, national and international
organizations to provide advisory services for various healthcare ventures. The scope of these
services range from managing current healthcare operations that are designed to improve clinical
quality, innovation, patient care, medical education and research at other healthcare organizations
and educational institutions to managing the construction, training, organizational infrastructure,
and operational management of healthcare entities. The System recognizes revenues related to
management service agreements on a pro rata basis over the term of the agreements as services are
provided. Payments received in advance are recorded as deferred revenue until the services have
been provided. The System has recorded deferred revenue related to management service
agreements, included in other current liabilities, of $13.6 million and $15.0 million at
December 31, 2016 and 2015, respectively. Revenue related to management service agreements
for 2016 and 2015 was $99.5 million and $58.3 million, respectively, and is included in other
unrestricted revenues.
Cash and Cash Equivalents
The System considers all highly liquid investments with original maturities of three months or less
when purchased to be cash equivalents. Cash equivalents are recorded at fair value in the
consolidated balance sheets and exclude amounts included in long-term investments and
investments for current use.
Inventories
Inventories (primarily supplies and pharmaceuticals) are stated at an average cost or the lower of
cost (first-in, first-out method) or market and are recorded in other current assets.
Property, Plant, and Equipment
Property, plant, and equipment purchased by the System are recorded at cost. Donated property,
plant, and equipment are recorded at fair value at the date of donation. Expenditures that
substantially increase the useful lives of existing assets are capitalized. Routine maintenance and
repairs are expensed as incurred. Depreciation, including amortization of capital leased assets, is
computed by the straight-line method using the estimated useful lives of individual assets.
Buildings and building components are assigned useful lives ranging from five years to forty years.
1612-2136592
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Cleveland Clinic Health System
Notes to Consolidated Financial Statements (continued)
3. Accounting Policies (continued)
Equipment is assigned a useful life ranging from three to twenty years. Interest cost incurred on
borrowed funds during the period of construction of capital assets and interest income on
unexpended project funds are capitalized as a component of the cost of acquiring those assets.
The System records costs and legal obligations associated with long-lived asset retirements. Assets
acquired though capital lease arrangements are excluded from the consolidated statements of cash
flows.
Impairment of Long-Lived Assets
The System evaluates the recoverability of long-lived assets and the related estimated remaining
lives when indicators of impairment are present. For purposes of impairment analysis, assets are
grouped with other assets and liabilities at the lowest level for which identifiable cash flows are
largely independent of the cash flows of other assets and liabilities. The System records an
impairment charge or changes the useful life if events or changes in circumstances indicate that
the carrying amount may not be recoverable or the useful life has changed.
Investments and Investment Income
Investments in equity securities with readily determinable fair values and all investments in debt
securities are recorded at fair value in the consolidated balance sheets. Investments, excluding
alternative investments, are primarily classified as trading. Investment transactions are recorded
on a settlement date basis. Realized gains and losses are determined using the average cost method.
Commingled investment funds are valued using, as a practical expedient, the net asset value as
provided by the respective investment companies and partnerships. There are no significant
redemption restrictions on the commingled investment funds.
Investments in alternative investments, which include hedge funds, private equity/venture funds
and real estate funds, are primarily limited partnerships that invest in marketable securities,
privately held securities, real estate, and derivative products and are reported using the equity
method of accounting based on net asset value information provided by the respective partnership
or third-party fund administrators. Investments held by the partnerships consist of marketable
securities as well as securities that do not have readily determinable values. The values of the
securities held by the limited partnerships that do not have readily determinable values are
determined by the general partner and are based on historical cost, appraisals, or other valuation
estimates that require varying degrees of judgment. There is inherent uncertainty in such
1612-2136592
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Cleveland Clinic Health System
Notes to Consolidated Financial Statements (continued)
3. Accounting Policies (continued)
valuations, and the estimated fair values may differ from the values that would have been used had
a ready market for the securities existed. Generally, the equity method investment balance of the
System’s holdings in alternative investments reflects net contributions to the partnerships and the
System’s share of realized and unrealized investment income and expenses. The investments may
individually expose the System to securities lending, short sales, and trading in futures and forward
contract options and other derivative products. The System’s risk is limited to its carrying value.
The financial statements of the limited partnerships are audited annually.
Alternative investments can be divested only at specified times in accordance with terms of the
partnership agreements. Hedge fund redemptions typically contain restrictions that allow for a
portion of the withdrawal proceeds to be held back from distribution while the underlying
investments are liquidated. These redemptions are subject to lock-up provisions that are generally
imposed upon initial investment in the fund. Private equity/venture funds and real estate funds are
generally closed-end funds and have significant redemption restrictions that prohibit redemptions
during the fund’s life.
Investment return, including equity method income on alternative investments, is reported as
nonoperating gains and losses, except for earnings on funds held by bond trustees and interest and
dividends earned on assets held for self-insurance, which are included in other unrestricted
revenues. Donor-restricted investment return on temporarily and permanently restricted
investments is included in temporarily restricted net assets.
Certain of the System’s assets and liabilities are exposed to various risks, such as interest rate,
market, and credit risks.
Fair Value Measurements
Fair value measurements are defined as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at the measurement date.
Authoritative guidance provides an option to elect fair value as an alternative measurement for
selected financial assets and liabilities not previously recorded at fair value. The System did not
elect fair value accounting for any assets or liabilities that are not currently required to be measured
at fair value.
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Cleveland Clinic Health System
Notes to Consolidated Financial Statements (continued)
3. Accounting Policies (continued)
The framework for measuring fair value is comprised of a three-level hierarchy based upon the
transparency of inputs to the valuation of an asset or liability as of the measurement date. The three
levels are defined as follows:
•
Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical
assets or liabilities in active markets.
•
Level 2 – inputs to the valuation methodology include quoted prices for similar assets or
liabilities in active markets, and inputs that are observable for the asset or liability, either
directly or indirectly, for substantially the full term of the financial instrument.
•
Level 3 – inputs to the valuation methodology are unobservable and significant to the fair
value measurement.
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest
level of input that is significant to the fair value measurement.
Goodwill and Other Intangibles
Goodwill has resulted from business combinations, primarily international business and physician
practice acquisitions, and is based on the purchase price in excess of the fair values of assets
acquired and liabilities assumed at the acquisition date. Annually, or when indicators of
impairment exist, the System evaluates goodwill for impairment to determine whether there are
events or circumstances that indicate it is more likely than not that the fair value of a reporting unit
is less than its carrying amount. The System considers assets to be impaired and writes them down
to fair value if the expected undiscounted cash flows are less than the carrying amounts.
Intangible assets other than goodwill are recorded at fair value in the period of acquisition.
Intangible assets with finite lives, which consist primarily of patient medical records, non-compete
agreements and leasehold interests, are amortized over their estimated useful lives, ranging from
two to five years, with a weighted-average amortization period of approximately three years.
1612-2136592
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Cleveland Clinic Health System
Notes to Consolidated Financial Statements (continued)
3. Accounting Policies (continued)
Derivatives and Hedging Activities
The System’s derivative financial instruments consist of interest rate swaps and foreign currency
forward contracts (Note 13), which are recognized as assets or liabilities in the consolidated
balance sheets at fair value.
The System accounts for changes in the fair value of derivative instruments depending on whether
they are designated and qualified as part of a hedging relationship and further, on the type of
hedging relationship. The System has not designated any derivative instruments as hedges.
Accordingly, the changes in fair value of derivative instruments and the related cash payments are
recorded in derivative losses in the consolidated statements of operations and changes in net assets.
Foreign Currency Translation
The statements of operations of foreign subsidiaries whose functional currencies are other than the
U.S. dollar are translated into U.S. dollars using average exchange rates for the period. The assets
and liabilities of foreign subsidiaries whose functional currencies are other than the U.S. dollar are
translated into U.S. dollars using exchange rates as of the balance sheet date. The U.S. dollar effects
that arise from translating the net assets of these subsidiaries at changing rates are recorded as
foreign currency translation gains and losses in the consolidated statements of operations and
changes in net assets. Cumulative foreign currency translation losses included in unrestricted net
assets were $71.4 million and $12.2 million at December 31, 2016 and 2015, respectively.
Debt Issuance Costs
Debt issuance costs are amortized over the period the obligation is outstanding using the
straight-line method, which approximates the interest method.
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Cleveland Clinic Health System
Notes to Consolidated Financial Statements (continued)
3. Accounting Policies (continued)
Contributions
Unconditional donor pledges to give cash, marketable securities, and other assets are reported at
fair value at the date the pledge is made to the extent estimated to be collectible by the System.
Conditional donor promises to give and indications of intentions to give are not recognized until
the condition is satisfied. Pledges received with donor restrictions that limit the use of the donated
assets are reported as either temporarily or permanently restricted support. When a donor
restriction expires, that is, when a stipulated time restriction ends or purpose restriction is
accomplished, temporarily restricted net assets are transferred to unrestricted net assets and
reported in the consolidated statements of operations and changes in net assets as other unrestricted
revenues if the purpose relates to operations or reported as a change in unrestricted net assets if
the purpose relates to capital.
No amounts have been reflected in the consolidated financial statements for donated services.
The System pays for most services requiring specific expertise. However, many individuals
volunteer their time and perform a variety of tasks that assist the System with various programs.
Grants
Grant revenue is recognized in the period it is earned based on when the applicable project
expenses are incurred and project milestones are achieved. Grant payments received in advance of
related project expenses are deferred until the expenditure has been incurred and recorded as
deferred revenue and included in other current liabilities. The System recorded research grant
revenue, included in other unrestricted revenues, of $189.2 million and $176.5 million in 2016 and
2015, respectively.
Temporarily and Permanently Restricted Net Assets
Temporarily restricted net assets are used to differentiate resources, the use of which is restricted
by donors or grantors to a specific time period or purpose, from resources on which no restrictions
have been placed or that arise from the general operations of the System. Temporarily restricted
gifts and bequests are recorded as an addition to temporarily restricted net assets in the period
received. Permanently restricted net assets consist of amounts held in perpetuity or for terms
designated by donors, including the fair value of several perpetual trusts for which the System is
an income beneficiary, or the beneficial interest in the fair value of underlying trust assets. Earnings
on permanently restricted net assets are recorded as investment income in temporarily restricted
net assets and subsequently used in accordance with the donor’s designation. Temporarily and
permanently restricted net assets are primarily restricted for research, education, and strategic
capital projects.
1612-2136592
22
Cleveland Clinic Health System
Notes to Consolidated Financial Statements (continued)
3. Accounting Policies (continued)
Excess of Revenues Over Expenses
The consolidated statements of operations and changes in net assets include excess of revenues
over expenses. Changes in unrestricted net assets, which are excluded from excess of revenues
over expenses, consistent with industry practice, include unrealized gains and losses on
investments classified as nontrading, retirement benefits adjustments, foreign currency translation
gains and losses, contributions of long-lived assets (including assets acquired using grants or
contributions that by donor restriction were to be used for the purpose of acquiring such assets),
and transfers of net assets to maintain donor-restricted endowment funds at the level required by
donor stipulations or law.
4. Net Patient Service Revenue and Patient Receivables
Net patient service revenue before the provision for uncollectible accounts by major payor source
for the years ended December 31, 2016 and 2015, are as follows (in thousands):
2016
Medicare
Medicaid
Managed care and commercial
Self-pay
$ 2,521,242
572,130
4,288,570
169,124
$ 7,551,066
2015
33%
8
57
2
100%
$ 2,012,743
420,960
3,983,065
295,715
$ 6,712,483
30%
6
60
4
100%
The System has experienced an increase in Medicare and Medicaid revenue primarily as a result
of the Affordable Care Act and other industry trends. The State of Ohio expanded Medicaid
eligibility in 2014, which has increased enrollment in the Medicaid program and allowed former
uninsured patients to shift into the expanded Medicaid program. The System records an estimated
provision for uncollectible accounts in the year of service for self-pay accounts receivable, which
includes patient receivables associated with self-pay patients and deductible and copayment
balances for which third-party coverage provides for a portion of the services provided.
The System’s allowance for doubtful accounts was 15% and 18% of accounts receivable at
December 31, 2016 and 2015, respectively. Write-offs on self-pay accounts receivable increased
$81.1 million in 2016 compared to 2015. The System does not maintain a material allowance for
uncollectible accounts for third-party payors.
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23
Cleveland Clinic Health System
Notes to Consolidated Financial Statements (continued)
4. Net Patient Service Revenue and Patient Receivables (continued)
The System’s concentration of credit risk relating to patient receivables is limited due to the
diversity of patients and payors. Patient receivables consist of amounts due from government
programs, commercial insurance companies, other group insurance programs, and private pay
patients. Patient receivables due from Medicare, Medicaid, and one commercial payor account for
approximately 29%, 8%, and 23% at December 31, 2016, and 25%, 6%, and 24% at December 31,
2015, respectively, of the System’s total patient receivables. Revenues from the Medicare and
Medicaid programs and one commercial payor account for approximately 33%, 8%, and 17% for
2016, and 30%, 6%, and 17% for 2015, respectively, of the System’s net patient service revenue.
Excluding these payors, no one payor represents more than 10% of the System’s patient receivables
or net patient service revenue.
5. Cash, Cash Equivalents, and Investments
The composition of cash, cash equivalents, and investments at December 31, 2016 and 2015, is as
follows (in thousands):
2016
Cash and cash equivalents
Fixed income securities:
U.S. treasuries
U.S. government agencies
U.S. corporate
U.S. government agencies asset-backed securities
Corporate asset-backed securities
Foreign
Fixed income mutual funds
Commingled fixed income funds
Common and preferred stocks:
U.S.
Foreign
Equity mutual funds
Commingled equity funds
Commingled commodity funds
Alternative investments:
Hedge funds
Private equity/venture funds
Real estate
Total cash, cash equivalents, and investments
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$
2015
687,410 $
562,406
963,715
20,270
167,025
25,102
2,829
44,759
222,670
663,154
810,036
22,158
147,703
18,519
7,295
40,774
172,996
690,372
422,947
267,061
381,686
1,591,389
122,297
418,135
252,376
262,774
1,453,528
117,100
1,350,427
1,134,136
541,009
696,786
404,748
452,018
$ 7,865,254 $ 7,272,356
24
Cleveland Clinic Health System
Notes to Consolidated Financial Statements (continued)
5. Cash, Cash Equivalents, and Investments (continued)
Investments are primarily maintained in a master trust fund administered using a bank as trustee.
The management of the majority of the System’s investments is conducted by numerous external
investment management organizations that are monitored by management and an external
third-party advisor. Of these investment managers, 20 managers focus on equity investments,
11 managers focus on fixed income investments, and 107 managers focus on alternative
investments. The alternative investments have separate administrators and custodian
arrangements. Alternative investments also include three holdings in which the System invests
directly.
Total investment return (loss) is comprised of the following for the years ended December 31,
2016 and 2015 (in thousands):
2016
Other unrestricted revenues:
Interest income and dividends
Nonoperating gains (losses), net:
Interest income and dividends
Net realized gains on sales of investments
Net change in unrealized gains (losses) on investments
Equity method income on alternative investments
Investment management fees
Other changes in net assets:
Net change in unrealized gains (losses)
on nontrading investments
Investment income (loss) on restricted investments
Total investment return (loss)
1612-2136592
$
2,750 $
61,430
157,358
100,079
104,184
(18,860)
404,191
$
320
24,451
431,712 $
2015
2,123
49,851
156,710
(314,771)
69,600
(17,718)
(56,328)
(4,947)
(732)
(59,884)
25
Cleveland Clinic Health System
Notes to Consolidated Financial Statements (continued)
6. Other Current Assets and Liabilities and Other Noncurrent Assets and Liabilities
Other current and noncurrent assets at December 31, 2016 and 2015, consist of the following
(in thousands):
Current:
Inventories
Pledges receivable current (see Note 10)
Prepaid expenses
Estimated amounts due from third-party payors
Research receivables
Other
Total other current assets
Noncurrent:
Deferred compensation plan assets
Goodwill and other intangible assets
Note receivable
Investments in affiliates
Other
Total other noncurrent assets
1612-2136592
$
$
$
$
2016
2015
133,074 $
58,188
52,989
41,162
36,390
75,089
396,892 $
125,536
37,703
54,211
90,045
35,099
65,545
408,139
2016
2015
162,820 $
92,574
37,455
37,244
79,914
410,007 $
136,012
90,407
13,535
33,868
79,929
353,751
26
Cleveland Clinic Health System
Notes to Consolidated Financial Statements (continued)
6. Other Current Assets and Liabilities and Other Noncurrent Assets and Liabilities
(continued)
Other current and noncurrent liabilities at December 31, 2016 and 2015 consist of the following
(in thousands):
2016
Current:
Research deferred revenue
Interest payable
Current portion of professional and general
liability insurance reserves (see Note 14)
Estimated amounts due to third-party payors
Management contracts and other deferred revenue
Employee benefit related liabilities
Foreign currency forward contracts (see Note 13)
State assessment liabilities
Other
Total other current liabilities
Noncurrent:
Employee benefit related liabilities
Interest rate swap liabilities (see Note 13)
Pledge liabilities
Estimated amounts due to third-party payors
Gift annuity liabilities
Accrued income tax liabilities (see Note 16)
Other
Total other noncurrent liabilities
1612-2136592
$
$
$
$
2015
71,885 $
64,141
73,639
61,314
52,125
45,000
38,602
34,384
11,076
5,185
140,163
462,561 $
52,223
48,639
40,432
38,452
–
40,869
111,474
467,042
2016
2015
216,666 $
139,422
34,134
24,523
11,114
2,258
62,428
490,545 $
190,962
159,333
33,518
16,284
10,480
4,062
63,713
478,352
27
Cleveland Clinic Health System
Notes to Consolidated Financial Statements (continued)
7. Goodwill and Other Intangible Assets
In 2016, the System recorded goodwill of $4.1 million related to the acquisitions of various
physician practices. In 2015, the System recorded goodwill of $79.2 million related to the
acquisitions of Grosvenor Place and various physician practices. Subsequent to the acquisition of
Grosvenor Place, the System established a plan to change the use of the facility. As a result of the
expected changes in the business, the System determined that the fair value of the reporting unit
was below the carrying amount. The fair value of the reporting unit was determined using
techniques consistent with the market approach. The System recorded a goodwill impairment loss
of $63.1 million in the consolidated statement of operations and changes in net assets for the year
ended December 31, 2015. Goodwill is recorded in other noncurrent assets in the consolidated
balance sheets.
The changes in the carrying amount of goodwill for the years ended December 31, 2016 and 2015
are as follows (in thousands):
Year Ended December 31
2016
2015
Balance, beginning of year
Goodwill acquired
Goodwill impairment loss
Balance, end of year
$
$
54,411 $
4,086
–
58,497 $
38,319
79,152
(63,060)
54,411
In 2016, the System acquired other intangible assets of $0.4 million related to physician practice
acquisitions. In 2015, the System acquired other intangible assets of $34.7 million, comprised of
$32.3 million related to the member substitution of Akron General and $2.4 million related to
physician practice acquisitions. Other intangible assets are recorded in other noncurrent assets in
the consolidated balance sheets.
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Cleveland Clinic Health System
Notes to Consolidated Financial Statements (continued)
7. Goodwill and Other Intangible Assets (continued)
Other intangible assets at December 31, 2016 and 2015 consist of the following (in thousands):
2016
Historical Accumulated
Cost
Amortization
Trade name
Finite-lived intangible
assets
Total
2015
Historical Accumulated
Cost
Amortization
$
31,700 $
– $
31,700 $
–
$
6,643
38,343 $
4,266
4,266 $
6,261
37,961 $
1,965
1,965
Amortization related to finite-lived intangible assets was $2.3 million and $1.3 million in 2016
and 2015, respectively, and is included in depreciation and amortization in the consolidated
statements of operations and changes in net assets. Future amortization is as follows
(in thousands): 2017 – $1,576; 2018 – $623; 2019 – $152; and 2020 – $26.
8. Fair Value Measurements
The carrying values of accounts receivable and accounts payable are reasonable estimates of fair
value due to the short-term nature of these financial instruments. Investments, other than
alternative investments, are recorded at their fair value. Other current and noncurrent assets and
liabilities have carrying values that approximate fair value.
The fair value of the System’s pledges receivable is based on discounted cash flow analysis using
treasury yield curve interest rates consistent with the maturities of the pledges receivable and
adjusted for consideration of the donor’s credit. The fair value of pledges receivable was
$211.7 million and $185.4 million (see carrying value at Note 10) at December 31, 2016 and 2015,
respectively. Pledges receivable would be classified as Level 3 in the fair value hierarchy.
The fair value of the System’s long-term debt is estimated by discounted cash flow analyses using
current borrowing rates for similar types of borrowing arrangements and adjusted for the System’s
credit. Inputs, which include reported/comparable trades, broker/dealer quotes, bids and offerings,
are obtained from various sources, including market participants, dealers, brokers and various
news media/market information. The fair value of long-term debt was $3.6 billion and $3.5 billion
(see carrying value at Note 12) at December 31, 2016 and 2015, respectively. Long-term debt
would be classified as Level 2 in the fair value hierarchy.
1612-2136592
29
Cleveland Clinic Health System
Notes to Consolidated Financial Statements (continued)
8. Fair Value Measurements (continued)
The following tables present the financial instruments measured at fair value on a recurring basis
as of December 31, 2016 and 2015, based on the valuation hierarchy (in thousands):
December 31, 2016
Level 1
Level 2
Level 3
Assets
Cash and investments:
Cash and cash equivalents
– $
$ 687,410 $
Fixed income securities:
U.S. treasuries
–
963,715
U.S. government agencies
–
20,270
U.S. corporate
–
167,025
U.S. government agencies assetbacked securities
–
25,102
Corporate asset-backed
securities
–
2,829
Foreign
–
44,759
Fixed income mutual funds
–
222,670
Common and preferred stocks:
U.S.
420,744
2,203
Foreign
265,689
1,372
Equity mutual funds
–
381,686
Total cash and investments
2,941,914
263,560
Perpetual and charitable trusts
–
45,350
Total assets at fair value
$ 2,941,914 $ 308,910 $
Liabilities
Interest rate swaps
Foreign currency forward contracts
Total liabilities at fair value
1612-2136592
$
$
– $
–
– $
139,422 $
11,076
150,498 $
Total
– $
687,410
–
–
–
963,715
20,270
167,025
–
25,102
–
–
–
2,829
44,759
222,670
–
422,947
–
267,061
–
381,686
–
3,205,474
–
45,350
– $ 3,250,824
– $
–
– $
139,422
11,076
150,498
30
Cleveland Clinic Health System
Notes to Consolidated Financial Statements (continued)
8. Fair Value Measurements (continued)
December 31, 2015
Level 1
Level 2
Level 3
Assets
Cash and investments:
Cash and cash equivalents
$ 562,350 $
56 $
Fixed income securities:
U.S. treasuries
810,036
–
U.S. government agencies
–
22,158
U.S. corporate
–
147,703
U.S. government agencies assetbacked securities
–
18,519
Corporate asset-backed
securities
–
7,295
Foreign
–
40,774
Fixed income mutual funds
172,996
–
Common and preferred stocks:
U.S.
416,316
1,819
Foreign
251,046
1,330
Equity mutual funds
262,774
–
Total cash and investments
2,475,518
239,654
Perpetual and charitable trusts
–
65,305
Total assets at fair value
$ 2,475,518 $ 304,959 $
Liabilities
Interest rate swaps
Total liabilities at fair value
1612-2136592
$
$
– $
– $
159,333 $
159,333 $
Total
– $
562,406
–
–
–
810,036
22,158
147,703
–
18,519
–
–
–
7,295
40,774
172,996
–
418,135
–
252,376
–
262,774
–
2,715,172
–
65,305
– $ 2,780,477
– $
– $
159,333
159,333
31
Cleveland Clinic Health System
Notes to Consolidated Financial Statements (continued)
8. Fair Value Measurements (continued)
Financial instruments at December 31, 2016 and 2015 are reflected in the consolidated balance
sheets as follows (in thousands):
2016
Cash, cash equivalents, and investments measured
at fair value
Commingled funds measured at net asset value
Alternative investments accounted for under the
equity method
Total cash, cash equivalents, and investments
Perpetual and charitable trusts measured at fair value
Interests in foundations
Trusts and interests in foundations
2015
$ 3,205,474 $ 2,715,172
2,261,000
2,376,840
2,296,184
2,282,940
$ 7,865,254 $ 7,272,356
$
$
45,350 $
21,869
67,219 $
65,305
21,436
86,741
Interest rate swaps and forward currency forward contracts (Note 13) are reported in other
noncurrent liabilities in the consolidated balance sheets.
The following is a description of the System’s valuation methodologies for assets and liabilities
measured at fair value. Fair value for Level 1 is based upon quoted market prices. Fair value for
Level 2 is determined as follows:
Investments classified as Level 2 are primarily determined using techniques that are consistent
with the market approach. Valuations are based on quoted prices for similar instruments in
active markets, quoted prices for identical or similar instruments in markets that are not active,
and model-based valuation techniques for which all significant assumptions are observable in
the market or can be corroborated by observable market data for substantially the full term of
the assets. Inputs, which include broker/dealer quotes, reported/comparable trades, and
benchmark yields, are obtained from various sources, including market participants, dealers,
and brokers.
1612-2136592
32
Cleveland Clinic Health System
Notes to Consolidated Financial Statements (continued)
8. Fair Value Measurements (continued)
The fair value of perpetual and charitable trusts in which the System receives periodic
payments from the trust is determined based on the present value of expected cash flows to be
received from the trust using discount rates ranging from 1.9% to 5.0%, which are based on
Treasury yield curve interest rates or the assumed yield of the trust assets. The fair value of
charitable trusts in which the System is a remainder beneficiary is based on the System’s
beneficial interest in the investments held in the trust, which are measured at fair value.
The fair value of interest rate swaps is determined based on the present value of expected future
cash flows using discount rates appropriate with the risks involved. The valuations include a
credit spread adjustment to market interest rate curves to appropriately reflect nonperformance
risk. The credit spread adjustment is derived from other comparably rated entities’ bonds
recently priced in the market. The System manages credit risk based on the net portfolio
exposure with each counterparty.
The fair value of foreign currency forward contracts is based on the difference between the
contracted forward rate and current market foreign currency exchange rates. A credit spread
adjustment is included in the valuations to appropriately reflect nonperformance risk. The
credit spread adjustment is derived from other comparably rated entities’ bonds recently priced
in the market.
The methods described above may produce a fair value calculation that may not be indicative of
net realizable value or reflective of future fair values. Furthermore, while the System believes its
valuation methods are appropriate and consistent with other market participants, the use of
different methodologies or assumptions to determine the fair value of certain financial instruments
could result in a different estimate of fair value at the reporting date.
1612-2136592
33
Cleveland Clinic Health System
Notes to Consolidated Financial Statements (continued)
9. Property, Plant, and Equipment
Property, plant, and equipment at December 31, 2016 and 2015 consist of the following
(in thousands):
2016
Land and improvements
Buildings
Leasehold improvements
Equipment
Computer hardware and software
Construction-in-progress
Leased facilities and equipment
Accumulated depreciation and amortization
2015
390,669 $ 382,832
5,075,427
5,350,756
30,254
30,609
1,541,883
1,599,562
760,757
797,300
468,380
611,587
144,794
150,561
8,404,327
8,931,044
(4,418,966) (4,015,660)
$ 4,512,078 $ 4,388,667
$
Included in the preceding table is unamortized computer software of $188.3 million and
$81.1 million at December 31, 2016 and 2015, respectively. Amortization of computer software
totaled $48.9 million and $32.1 million in 2016 and 2015, respectively. Amortization of computer
software for the five years subsequent to December 31, 2016, is as follows (in millions): 2017 –
$43.9; 2018 – $33.5; 2019 – $23.5; 2020 – $17.4; and 2021 – $15.9.
Accumulated amortization of leased facilities and equipment was $58.8 million and $40.2 million
at December 31, 2016 and 2015, respectively.
1612-2136592
34
Cleveland Clinic Health System
Notes to Consolidated Financial Statements (continued)
10. Pledges Receivable
Outstanding pledges receivable from various corporations, foundations, and individuals at
December 31, 2016 and 2015, are as follows (in thousands):
Pledges due:
In less than one year
In one to five years
In more than five years
$
Allowance for uncollectible pledges and discounting
Current portion (net of allowance for uncollectible pledges
of $13.9 million in 2016 and $20.4 million in 2015)
$
2016
2015
72,117 $
108,075
88,540
268,732
(59,835)
58,082
83,460
99,958
241,500
(62,329)
(58,188)
150,709 $
(37,703)
141,468
11. Notes Payable and Capital Leases
Notes payable and capital leases at December 31, 2016 and 2015 consist of the following
(in thousands):
Notes payable with interest rates up to 6.0%
Revolving credit facility
Capital leases for facilities and equipment
City of Lakewood lease
Unamortized debt issuance costs
Less current portion
Total notes payable and capital leases
$
$
2016
2015
381,308 $
60,000
96,435
1,565
539,308
(620)
(21,969)
516,719 $
390,099
–
108,085
2,715
500,899
–
(34,879)
466,020
In 2015, the System executed a $375.0 million term loan agreement with a financial institution.
The proceeds of the term loan were used to finance the System’s international business strategy.
The term loan matures in 2018 and bears interest at a variable rate based on the London Interbank
Offered Rate (LIBOR) plus an applicable spread. The interest rate on the term loan ranged from
0.73% to 1.11% in 2016 (average rate 0.99%) and from 0.69% to 0.73% in 2015 (average rate
0.72%).
1612-2136592
35
Cleveland Clinic Health System
Notes to Consolidated Financial Statements (continued)
11. Notes Payable and Capital Leases (continued)
In 2016, the System entered into a $300.0 million revolving credit facility with multiple financial
institutions. The revolving credit facility expires in 2019 with provisions allowing the Foundation
to extend the term for one-year periods. The facility allows the System to enter into short-term
loans that automatically renew throughout the term of the facility. At December 31, 2016, the
System has the intent and the ability to refinance the short-term loans beyond one year.
The revolving credit facility bears interest at a variable rate based on the London Interbank Offered
Rate (LIBOR) plus an applicable spread. Amounts outstanding on the revolving credit facility as
of December 31, 2016 totaled $60.0 million. The proceeds were used to pay the full outstanding
amount on a line of credit executed in January 2016 that was used to defease the Series 2012 Akron
Bonds and redeem the Series 2012 taxable Akron Bonds (Note 12). The line of credit was
terminated in 2016. The interest rate on the revolving credit facility ranged from 1.38% to 1.53%
in 2016 (average rate 1.40%).
Maturities of the notes payable and revolving credit facility for the five years subsequent to
December 31, 2016, are as follows (in thousands): 2017 – $4,866; 2018 – $376,416; 2019 –
$60,026; 2020 – $0; and 2021 – $0.
Future minimum capital lease payments, including total interest of $22.7 million, are as follows
(in thousands): 2017 – $20,712; 2018 – $18,744; 2019 – $18,437; 2020 – $12,181; and 2021 –
$10,809; and thereafter – $38,264. Assets acquired through capital lease arrangements are included
in property, plant, and equipment.
The City of Lakewood, Ohio (the City) leases real and personal property to Lakewood Hospital
Association (LHA) for the purpose of enabling the operation of certain healthcare services at
Lakewood Hospital. In connection with executing an Amended Lease with the City, LHA had
agreed to make additional payments to the City. In 2015, the Amended Lease was further amended
to shorten the lease term and to reduce the total payments due under the lease. The payments under
the current lease as amended range in annual amounts up to $1.2 million through 2018, or until
certain provisions in the lease are satisfied. The net present value of the additional payments
discounted at an interest rate of 6% is $1.6 million and $2.7 million at December 31, 2016 and
2015, respectively. The System recorded a $6.9 million gain in special charges (Note 20) related
to the change in lease terms for the year ended December 31, 2015. LHA has approximately
$27 million of net assets, included in the System’s unrestricted net assets at December 31, 2016,
available for use under the terms of the current lease but unavailable to other members of the
System.
1612-2136592
36
Cleveland Clinic Health System
Notes to Consolidated Financial Statements (continued)
12. Bonds
Bonds at December 31, 2016 and 2015 consist of the following (in thousands):
Series 2016, Private Placement
Series 2016, Term Loan
Series 2014
Series 2014A CP Notes
Series 2014A, Akron
Series 2014B, Akron
Series 2013A
Series 2013B
Series 2013, Keep Memory Alive
Series 2012A
Series 2012, Akron
Series 2012 taxable, Akron
Series 2011A
Series 2011B
Series 2011C
Series 2009A
Series 2009B
Series 2008A
Series 2008B
Series 2003C
Series 2002
Net unamortized premium
Unamortized debt issuance costs
Current portion
Long-term variable rate debt classified
as current
1612-2136592
Interest
Rate(s)
Final
Maturity
3.35%
Variable rate
4.86%
Variable rate
Variable rate
Variable rate
3.62% to 4.04%
Variable rate
Variable rate
1.23% to 4.07%
3.80% to 5.00%
Variable rate
2.45% to 4.83%
2.94%
2.73% to 4.72%
5.58%
3.74% to 5.58%
4.24% to 5.55%
Variable rate
Variable rate
Variable rate
2046
2026
2114
2044
2031
2031
2042
2039
2037
2039
2031
2019
2032
2031
2032
2039
2039
2043
2043
2035
2032
Amount Outstanding at
December 31
2016
2015
$
–
325,000 $
17,370
–
400,000
400,000
70,955
–
70,925
–
20,000
–
81,225
73,150
201,160
201,160
65,030
63,135
469,485
460,080
39,835
–
17,370
–
181,180
172,030
31,250
29,120
170,995
170,995
305,400
305,400
380,455
366,215
419,690
409,740
369,250
369,250
41,905
41,905
9,940
9,635
3,275,095
3,485,140
55,630
51,287
(23,187)
(22,593)
(60,815)
(59,770)
(519,252)
(527,115)
$ 2,926,949 $ 2,727,471
37
Cleveland Clinic Health System
Notes to Consolidated Financial Statements (continued)
12. Bonds (continued)
The majority of the System’s outstanding revenue bonds are limited obligations of various issuing
authorities payable solely by the System pursuant to loan agreements between the borrowing
entities and the issuing authorities. Under various financing agreements, the System must meet
certain operating and financial performance covenants. The Series 2016 private placement, the
Series 2016 term loan and the Series 2014 bonds are issued directly by the Foundation. The Series
2013 Keep Memory Alive bonds are issued directly by Keep Memory Alive, a non-obligated
affiliate of the System.
In January 2016, the System entered into a line of credit with a financial institution totaling
$60.0 million. The System drew the full amount on the line of credit and also issued $100.0 million
of Taxable Hospital Revenue Commercial Paper Notes (Series 2014A CP Notes). The proceeds
from the draw on the line of credit and a portion of the proceeds from the issuance of the Series
2014A CP Notes were used to defease the Series 2012 Akron Bonds and redeem the Series 2012
taxable Akron Bonds, the Series 2014A Akron Bonds and the Series 2014B Akron Bonds.
The System recorded a loss on extinguishment of debt of $3.9 million in 2016 related to this
transaction, which is recorded in other nonoperating gains and losses in the consolidated
statements of operations and changes in net assets.
In August 2016, the Foundation issued private placement debt totaling $325.0 million that was
purchased by a financial institution. The private placement debt matures in 2046 and bears interest
at a fixed rate of 3.35%. The proceeds of the private placement debt were used for the general
corporate purposes of the Foundation.
In November 2016, the System entered into a loan agreement with a financial institution totaling
$17.4 million. The loan matures in 2026 and bears interest at a variable rate based on the LIBOR
index rate plus an applicable spread. The proceeds of the loan were used to pay a portion of the
outstanding Series 2014A CP Notes.
Certain of the System’s current outstanding bonds bear interest at a variable rate. During 2016 and
2015, the rates for the System’s variable rate bonds ranged from 0.01% to 1.78% (average rate
0.45%) and 0.01% to 1.59% (average rate 0.11%), respectively.
1612-2136592
38
Cleveland Clinic Health System
Notes to Consolidated Financial Statements (continued)
12. Bonds (continued)
Certain variable rate revenue bonds are secured by irrevocable direct pay letters of credit and
standby bond purchase agreements totaling $377.5 million at December 31, 2016. Bonds are
classified as current in the consolidated balance sheets if they are supported by lines of credit or
standby bond purchase agreements that expire within one year, require repayment of a remarketing
draw within one year or contain a subjective clause that, if declared by the lender, could cause
immediate repayment of the bonds.
The System provides self-liquidity on the Series 2003C Bonds, certain sub-series of the Series
2008B Bonds and the Series 2014A CP Notes. These bonds are classified as current liabilities in
the consolidated balance sheets.
During the term of agreements with the issuing authorities, the System is required to make
specified deposits with trustees to fund principal and interest payments when due. Also,
unexpended bond proceeds are held by the trustee and released to the System for approved
requisition requests for capital projects. Unexpended bond proceeds representing a reserve fund
related to the Series 2012 Akron Bonds was $4.0 million at December 31, 2015. There was no
unexpended bond proceeds at December 31, 2016. The current portion of the funds held by
trustees, which consists of deposits with the trustees to fund current principal and interest
payments, was $1.6 million at December 31, 2015 and is included in investments for current use.
There was no current portion of funds held by trustees at December 31, 2016.
The System is subject to certain restrictive covenants, including provisions relating to certain debt
ratios, days cash on hand, and other matters. The System was in compliance with these covenants
at December 31, 2016 and 2015.
Combined current aggregate scheduled maturities, assuming the remarketing of the variable rate
demand bonds, for the five years subsequent to December 31, 2016, are as follows (in thousands):
2017 – $59,770; 2018 – $62,020; 2019 – $64,040; 2020 – $66,235; and 2021 – $69,210.
Total interest paid approximated $134.4 million and $122.1 million in 2016 and 2015, respectively.
Capitalized interest cost approximated $1.1 million and $2.8 million in 2016 and 2015,
respectively.
1612-2136592
39
Cleveland Clinic Health System
Notes to Consolidated Financial Statements (continued)
13. Derivative Instruments
The System has entered into various derivative financial instruments to manage interest rate risk
and foreign currency exposures.
The System’s objective with respect to interest rate risk is to manage the risk of rising interest rates
on the System’s variable rate debt and certain variable rate operating lease payments. Consistent
with its interest rate risk management objective, the System entered into various interest rate swap
agreements with a total outstanding notional amount of $633.1 million and $653.1 million at
December 31, 2016 and 2015, respectively. During the term of these transactions, the System pays
interest at a fixed rate and receives interest at a variable rate based on the London Interbank Offered
Rate (LIBOR) or the Securities Industry and Financial Markets Association Index (SIFMA).
The swap agreements are not designated as hedging instruments. Net interest paid or received
under the swap agreements is included in derivative losses in the consolidated statements of
operations and changes in net assets.
The following table summarizes the System’s interest rate swap agreements (in thousands):
Swap
Type
Expiration
Date
System
Pays
Fixed
Fixed
Fixed
Fixed
Fixed
Fixed
Fixed
Fixed
Fixed
Fixed
Fixed
Fixed
Fixed
Fixed
Fixed
2016
2021
2024
2027
2028
2028
2030
2030
2031
2032
2032
2032
2036
2036
2037
5.28%
3.21%
3.42%
3.56%
5.12%
3.51%
5.07%
5.06%
3.04%
4.32%
4.33%
3.78%
4.90%
4.90%
4.62%
1612-2136592
System Receives
100%
68%
68%
68%
100%
68%
100%
100%
68%
79%
70%
70%
100%
100%
100%
Notional Amount at
December 31
2016
2015
of SIFMA $
4,150
– $
of LIBOR
34,770
33,265
of LIBOR
28,300
27,800
of LIBOR
132,212
128,333
of LIBOR
39,815
38,800
of LIBOR
30,755
29,965
of LIBOR
62,500
60,825
of LIBOR
62,500
60,800
of LIBOR
53,900
52,625
of LIBOR
2,438
2,361
of LIBOR
4,874
4,723
of LIBOR
2,438
2,361
of LIBOR
50,000
49,725
of LIBOR
79,375
78,350
of SIFMA
65,030
63,135
$ 633,068 $ 653,057
40
Cleveland Clinic Health System
Notes to Consolidated Financial Statements (continued)
13. Derivative Instruments (continued)
The System is exposed to fluctuations in various foreign currencies against its functional currency,
the U.S. dollar (USD). The System uses foreign currency derivatives including currency forward
contracts and currency options to manage its exposure to fluctuations in the USD – British Pound
(GBP) exchange rate. Currency forward contracts involve fixing the USD – GBP exchange rate
for delivery of a specified amount of foreign currency on a specified date. The currency forward
contracts are typically cash settled in USD for their fair value at or close to their settlement date.
The System has also used currency option contracts to manage its foreign currency exchange risk.
In June 2016, the System entered into five foreign currency contracts, expiring between September
2016 and September 2017, with a total outstanding notional amount of $150 million. At
December 31, 2016, the System has three outstanding foreign currency forward contracts with a
total notional amount of $75 million. The foreign currency contracts are not designated as hedging
instruments.
The following table summarizes the location and fair value for the System’s derivative instruments
(in thousands):
Derivatives Liability
December 31, 2016
December 31, 2015
Balance Sheet
Balance Sheet
Location
Fair Value
Location
Fair Value
Derivatives not designated
as hedging instruments
Interest rate swap
Other noncurrent
Other noncurrent
agreements
liabilities
$ 159,333
$ 139,422 liabilities
Foreign currency contracts Other current
liabilities
$
–
$ 11,076
1612-2136592
41
Cleveland Clinic Health System
Notes to Consolidated Financial Statements (continued)
13. Derivative Instruments (continued)
The following table summarizes the location and amounts of derivative losses on the System’s
interest rate swap agreements (in thousands):
Location of Loss
Recognized
Derivatives not designated
as hedging instruments
Interest rate swap
agreements
Derivative losses
Foreign currency contracts Derivative losses
Year Ended December 31
2016
2015
$
$
(4,539) $
(18,285) $
(25,010)
–
The System has used various derivative contracts in connection with certain prior obligations and
investments. Although minimum credit ratings are required for counterparties, this does not
eliminate the risk that a counterparty may fail to honor its obligations. Derivative contracts are
subject to periodic “mark-to-market” valuations. A derivative contract may, at any time, have a
positive or negative value to the System. In the event that the negative value reaches certain
thresholds established in the derivative contracts, the System is required to post collateral, which
could adversely affect its liquidity. At December 31, 2016 and 2015, the System posted
$75.6 million and $94.1 million, respectively, of collateral with counterparties that is included in
funds held by trustees in the consolidated balance sheets. In addition, if the System were to choose
to terminate a derivative contract or if a derivative contract were terminated pursuant to an event
of default or a termination event as described in the derivative contract, the System could be
required to pay a termination payment to the counterparty.
1612-2136592
42
Cleveland Clinic Health System
Notes to Consolidated Financial Statements (continued)
14. Professional and General Liability Insurance
The System manages its professional and general liability insurance program through a captive
insurance arrangement, except for Akron General in 2015, which was self-insured for professional
and general liability claims. In 2016, professional and general liability insurance coverage for
Akron General was provided by the System’s captive insurance subsidiary.
In the ordinary course of business, professional and general liability claims have been asserted
against the System by various claimants. These claims are in various stages of processing or, in
certain instances, are in litigation. In addition, there are known incidents, and there also may be
unknown incidents, which may result in the assertion of additional claims. The System has accrued
its best estimate of both asserted and unasserted claims based on actuarially determined amounts.
These estimates are subject to the effects of trends in loss severity and frequency, and ultimate
settlement of professional and general liability claims may vary significantly from the estimated
amounts.
The System’s professional and general liability insurance reserves of $198.2 million and
$191.8 million at December 31, 2016 and 2015, respectively, are recorded as current and
noncurrent liabilities and include discounted estimates of the ultimate costs for both asserted
claims and unasserted claims. Asserted claims for the System’s reserves were discounted at 1.75%
and 1.50% at December 31, 2016 and 2015, respectively, except for Akron General, which
discounted asserted claims at 1.75% at December 31, 2015. Unasserted claims were discounted at
2.25% and 2.00% at December 31, 2016 and 2015, respectively. Through the captive insurance
subsidiary and a trust at Akron General, the System has set aside investments of $180.3 million
($52.1 million included in investments for current use) and $145.9 million ($52.2 million included
in investments for current use) at December 31, 2016 and 2015, respectively, of which
$37.0 million and $36.6 million at December 31, 2016 and 2015, respectively, are restricted in
accordance with reinsurance trust agreements related to coverage of the Florida operations and
other reinsurance programs provided by the captive insurance subsidiary, and $7.6 million at
December 31, 2015 is restricted in a separate trust established for the payment of self-insured
professional liability claims of Akron General. The assets in the trust were transferred to the
System’s captive insurance subsidiary in 2016.
1612-2136592
43
Cleveland Clinic Health System
Notes to Consolidated Financial Statements (continued)
14. Professional and General Liability Insurance (continued)
Activity in the professional and general liability insurance reserves is summarized as follows
(in thousands):
Balance at beginning of year
Incurred related to:
Current period
Prior period
Total incurred
$
Paid related to:
Current period
Prior period
Total paid
Increase (decrease) in unasserted claims
Decrease in reinsurance recoverable
Akron General member substitution
Balance at end of year
2016
2015
191,840 $
190,068
65,512
(13,985)
51,527
56,965
(4,145)
52,820
6,862
37,710
44,572
6,955
1,671
(2,232)
2,167
64,502
66,669
(13,849)
(2,174)
(105)
17,900
191,840
–
$
198,234 $
The foregoing reconciliation shows $14.0 million and $4.1 million of favorable development in
2016 and 2015, respectively, due to changes in actuarial estimates as a result of lower claim
activity, closed claims, and expedited settlement of claims, which has reduced claim expenses and
resulted in more favorable settlements. The System utilizes a combination of actual and industry
statistics to estimate loss and loss adjustment expense reserves.
1612-2136592
44
Cleveland Clinic Health System
Notes to Consolidated Financial Statements (continued)
15. Pensions and Other Postretirement Benefits
The System has four defined benefit pension plans, including two plans assumed by the System
from the Akron General member substitution. The CCHS Retirement Plan covers substantially all
employees of the System, except those employed by Akron General. The CCHS Retirement Plan
ceased benefit accruals as of December 31, 2009 for substantially all employees, with benefit
accruals for remaining employees ceasing at various intervals through December 31, 2012. Akron
General has a defined benefit plan covering substantially all of its employees that were hired before
2004 who meet certain eligibility requirements. In 2009, Akron General ceased benefit accruals
for substantially all nonunion employees. Benefits for union employees ceased at various intervals
through 2013 except in certain circumstances. The benefits for the System’s defined benefit
pension plans are provided based on age, years of service, and compensation. The System’s policy
for its defined benefit pension plans is to fund at least the minimum amounts required by the
Employee Retirement Income Security Act. The System also maintains two nonqualified defined
benefit supplemental retirement plans, which cover certain of its employees.
The System sponsors two noncontributory, defined contribution plans, and three contributory,
defined contribution plans, including two contributory defined contribution plans assumed by the
System from the Akron General member substitution. The Cleveland Clinic Investment Pension
Plan (IPP) is a noncontributory, defined contribution plan, which covers substantially all of the
System’s employees, except those employed by Akron General. The System’s contribution for the
IPP is based upon a percentage of employee compensation and years of service. The System
sponsors an additional noncontributory, defined contribution plan, which covers certain of its
employees. The System’s contribution to the plan is based upon a percentage of employee
compensation, as defined, determined according to age. The System also sponsors three
contributory, defined contribution plans, including two plans at Akron General, which cover
substantially all employees. Any System contribution to the applicable contributory plan is
determined based on employee contributions.
The System provides healthcare benefits upon retirement for substantially all of its employees who
meet certain minimum age and years of service provisions at retirement. The System’s healthcare
plans generally provide for cost sharing, in the form of retiree contributions, deductibles, and
coinsurance. The System’s policy is to fund the annual cost of healthcare benefits from the general
assets of the System. The estimated cost of these postretirement benefits is actuarially determined
and accrued over the employees’ service periods.
1612-2136592
45
Cleveland Clinic Health System
Notes to Consolidated Financial Statements (continued)
15. Pensions and Other Postretirement Benefits (continued)
In 2015, the System updated the generational mortality projections scale from Scale MP-2014 to
Scale MP-2015. In 2016, the System updated the generational mortality projections scale from
Scale MP-2015 to Scale MP-2016. The System believes that the updated mortality rates are the
best estimate of future experience.
The System expects to make contributions of $9.3 million to the defined benefit pension plans in
2017. Pension benefit payments over the next ten years are estimated as follows: 2017 –
$102.8 million; 2018 – $108.8 million; 2019 – $112.3 million; 2020 – $114.2 million; 2021 –
$116.6 million; and in the aggregate for the five years thereafter – $563.3 million.
The System expects to make contributions of $4.5 million to other postretirement benefit plans in
2017. Other postretirement benefit payments over the next ten years, net of the average annual
Medicare Part D subsidy of approximately $2.3 million, are estimated as follows: 2017 –
$4.5 million; 2018 – $4.6 million; 2019 – $4.6 million; 2020 – $4.6 million; 2021 – $4.4 million;
and in the aggregate for the five years thereafter – $18.3 million.
No plan assets are expected to be returned to the employer during 2017.
The System is required to recognize the funded status, which is the difference between the fair
value of plan assets and the projected benefit obligations, of its pension and other postretirement
benefit plans in the consolidated balance sheets, with a corresponding adjustment to unrestricted
net assets. Amounts recorded in unrestricted net assets consist of actuarial gains and losses and
prior service credits and costs. Actuarial gains and losses recorded in unrestricted net assets outside
of the corridor, which is 10% of the greater of the projected benefit obligation or the fair value of
the plan assets, will be recognized as a component of net periodic benefit cost immediately in the
current period. Prior service credits and costs will be amortized over future periods, pursuant to
the System’s accounting policy.
Unrecognized prior service credits and costs are amortized on a straight-line basis over the
estimated life of the plan participants. In 2017, the System is expected to amortize $2.6 million of
unrecognized prior service credits in net periodic benefit costs.
1612-2136592
46
Cleveland Clinic Health System
Notes to Consolidated Financial Statements (continued)
15. Pensions and Other Postretirement Benefits (continued)
Included in unrestricted net assets at December 31, 2016 and 2015 are the following amounts that
have not yet been recognized in net periodic benefit cost (in thousands):
Defined Benefit
Pension Plans
2016
2015
Unrecognized actuarial losses (gains)
Unrecognized prior service credit
Total
Other Postretirement
Benefits
2016
2015
$ 168,337 $ 146,336 $
(14,444)
(12,763)
$ 155,574 $ 131,892 $
(9,890) $
(8,946)
(18,836) $
(7,815)
(5,128)
(12,943)
Unrecognized actuarial losses (gains) included in unrestricted net assets represent amounts within
the corridor that do not require recognition in net periodic benefit cost for each respective year.
Changes in plan assets and benefit obligations recognized in unrestricted net assets for the years
ended December 31, 2016 and 2015 are as follows (in thousands):
Defined Benefit
Pension Plans
2016
2015
Current year actuarial (loss) gain
Recognition of actuarial loss in
excess of corridor
Current year prior service credit
Amortization of prior service credit
Total
1612-2136592
Other Postretirement
Benefits
2016
2015
$
(130,527) $
(16,382) $
6,482 $
15,545
$
108,526
–
(1,681)
(23,682) $
25,612
–
(1,681)
7,549 $
(4,407)
4,355
(537)
5,893 $
–
–
(1,347)
14,198
47
Cleveland Clinic Health System
Notes to Consolidated Financial Statements (continued)
15. Pensions and Other Postretirement Benefits (continued)
The following table sets forth the funded status of the System’s pensions and other postretirement
benefit plans and the amounts recognized in the System’s December 31, 2016 and 2015
consolidated balance sheets (in thousands):
Defined Benefit
Pension Plans
2016
2015
Change in projected benefit obligation:
Projected benefit obligation at beginning
of year
Service cost
Interest cost
Actuarial loss (gain)
Participant contributions
Plan amendments and benefit changes
Benefits paid
Federal subsidy
Member substitution
Projected benefit obligation at
end of year
Change in plan assets:
Fair value of plan assets at beginning
of year
Actual return on plan assets
Participant contributions
System contributions
Benefits paid
Member substitution
Fair value of plan assets at end of year
$
1,649,131 $ 1,556,304 $
2,463
2,178
65,703
76,074
(76,458)
98,362
–
–
–
–
(86,934)
(89,064)
–
188,053
–
Other Postretirement
Benefits
2016
2015
111,309 $
1,681
5,368
(6,482)
12,186
(4,357)
(21,928)
1,123
–
126,091
261
5,430
(15,546)
9,162
–
(20,322)
1,212
5,021
1,736,681
1,649,131
98,900
111,309
1,255,431
47,291
–
129,312
(89,064)
–
1,342,970
1,213,402
(8,861)
–
6,019
(86,934)
131,805
1,255,431
–
–
12,186
9,742
(21,928)
–
–
–
–
9,162
11,160
(20,322)
–
–
Accrued retirement benefits
$
(393,711) $
(393,700) $
(98,900) $
(111,309)
Current liabilities
Noncurrent liabilities
Net liability recognized in consolidated
balance sheets
$
(9,263) $
(384,448)
(9,382) $
(384,318)
(4,474) $
(94,426)
(4,874)
(106,435)
$
(393,711) $
(393,700) $
(98,900) $
(111,309)
The accumulated benefit obligation for all defined benefit pension plans was $1.7 billion and
$1.6 billion at December 31, 2016 and 2015, respectively.
1612-2136592
48
Cleveland Clinic Health System
Notes to Consolidated Financial Statements (continued)
15. Pensions and Other Postretirement Benefits (continued)
The components of net periodic benefit cost are as follows (in thousands):
Defined Benefit
Pension Plans
2016
2015
Components of net periodic
benefit cost:
Service cost
2,463 $
$
2,178 $
Interest cost
65,703
76,074
Expected return on plan assets
(83,979)
(79,456)
Recognition of actuarial loss
(gain) in excess of corridor
25,612
108,526
Amortization of unrecognized
prior service credit
(1,681)
(1,681)
Net periodic benefit cost
8,118
105,641
Defined contribution plans
188,247
217,941
Total included in operations
$ 323,582 $ 196,365 $
Other Postretirement
Benefits
2016
2015
1,681 $
5,368
261
5,430
–
–
–
(4,407)
(537)
2,105
(1,347)
4,344
–
–
2,105 $
4,344
Weighted-average assumptions used to determine pension and postretirement benefit obligations
and net periodic benefit cost are as follows:
Defined Benefit
Pension Plans
2016
2015
Weighted-average assumptions:
Discount rates:
Used for benefit obligations
Used for net periodic benefit
cost
Expected rate of return on
plan assets
Rate of compensation increase:
Used for benefit obligations
Used for net periodic benefit
cost
1612-2136592
Other Postretirement
Benefits
2016
2015
4.24%
4.74%
4.36%
4.85%
4.74%
4.30%
4.86%
4.43%
6.56%
7.06%
–
–
2.25%
2.25%
–
–
2.25%
2.37%
–
–
49
Cleveland Clinic Health System
Notes to Consolidated Financial Statements (continued)
15. Pensions and Other Postretirement Benefits (continued)
The System uses a direct cost approach to estimate its postretirement benefit obligation for
healthcare services provided by the System (internally provided services). Healthcare services
provided by non-System entities (externally provided services) are based on the System’s
historical cost experience.
The annual assumed healthcare cost trend rates for the next year and the assumed trend thereafter
is as follows:
Internally provided services:
Initial rate
Ultimate rate
Year ultimate reached
Externally provided services:
Initial rate
Ultimate rate
Year ultimate reached
2016
2015
5.50%
4.50%
2021
5.75%
4.50%
2021
6.50%
5.50%
2021
6.75%
5.50%
2021
A one-percentage-point increase or decrease in the healthcare cost trend rate would have increased
or decreased the December 31, 2016 service and interest costs in total by $2.5 million and
$1.7 million, respectively, and the December 31, 2015 service and interest costs in total by
$2.9 million and $1.8 million, respectively.
The System’s weighted-average asset allocation of pension plan assets at December 31, 2016 and
2015, by asset category, are as follows:
Percentage of Plan Assets
December 31 December 31
Target
2016
2015
Allocation
Asset category
Interest-bearing cash
Fixed income securities
Common and preferred stocks
Alternative investments
Total
1612-2136592
7.0%
47.0
31.1
14.9
100.0%
4.4%
48.4
27.6
19.6
100.0%
0%–10%
40%–80%
17%–37%
3%–23%
50
Cleveland Clinic Health System
Notes to Consolidated Financial Statements (continued)
15. Pensions and Other Postretirement Benefits (continued)
The System’s investment strategy for its pension assets balances the liquidity needs of the pension
plans with the long-term return goals necessary to satisfy future pension obligations. The target
allocation ranges of the investment pool to various asset classes are designed to diversify the
portfolio in a way that achieves an efficient trade-off between long-term return and risk while
providing adequate liquidity to meet near-term expenses and obligations.
The System’s weighted-average pension portfolio return assumption of 6.56% and 7.06% in 2016
and 2015, respectively, is based on the targeted assumed rate of return through its asset mix at the
beginning of each year, which is designed to mitigate short-term return volatility and achieve an
efficient trade-off between return and risk. Expected returns and risk for each asset class are formed
using a global capital asset pricing model framework in which the expected return is the
compensation earned from taking risk. Forward-looking adjustments are made to expected return,
volatility, and correlation estimates as well. Additionally, constraints such as permissible asset
classes, portfolio guidelines, and liquidity considerations are included in the model.
In 2015, the System updated its investment strategy and modified the target allocations of pension
plan assets in the CCHS Retirement Plan based on the current funded status of the plan. Coincident
with this update, the System reduced the asset allocation for common and preferred stocks with a
corresponding increase in fixed income securities. The updated investment strategy was
implemented because of the funded status of the pension plan and the anticipation that such
changes in investment strategy will result in lower volatility of future changes in funded status.
Once the new investment strategy is fully implemented, it is anticipated that the duration of the
investment assets will match the liabilities of the pension plan over time. Additional revisions in
asset allocations and expected rate of return on plan assets may occur based on future changes in
the funded status of the pension plans.
1612-2136592
51
Cleveland Clinic Health System
Notes to Consolidated Financial Statements (continued)
15. Pensions and Other Postretirement Benefits (continued)
The following tables present the financial instruments in the System’s defined benefit pension
plans measured at fair value on a recurring basis as of December 31, 2016 and 2015, based on the
valuation hierarchy (in thousands):
December 31, 2016
Assets
Cash and investments:
Cash and cash equivalents
Fixed income securities:
U.S. treasuries
U.S. government agencies
U.S. corporate
Foreign
Fixed income mutual funds
Common and preferred stocks:
U.S.
Foreign
Equity mutual funds
Total assets at fair value
1612-2136592
Level 1
$
$
Level 2
Level 3
Total
2 $
–
303,857
–
–
–
–
4,431
83,201
12,280
77,615
–
–
–
–
–
–
303,857
4,431
83,201
12,280
77,615
–
–
–
–
70,945
28,125
78,630
753,099
94,013 $
70,524
27,406
78,630
652,045 $
421
719
–
101,054 $
$
$
94,015
52
Cleveland Clinic Health System
Notes to Consolidated Financial Statements (continued)
15. Pensions and Other Postretirement Benefits (continued)
December 31, 2015
Assets
Cash and investments:
Cash and cash equivalents
Fixed income securities:
U.S. treasuries
U.S. government agencies
U.S. corporate
Foreign
Fixed income mutual funds
Common and preferred stocks:
U.S.
Foreign
Equity mutual funds
Total assets at fair value
Level 1
$
$
Level 2
Level 3
Total
9 $
–
308,329
–
–
–
–
5,230
74,798
10,909
64,599
–
–
–
–
–
–
308,329
5,230
74,798
10,909
64,599
–
–
–
62,312
25,555
36,133
643,987
56,113 $
61,930
24,915
36,133
552,019 $
382
640
–
$
– $
91,968 $
56,122
Total plan assets in the System’s defined benefit pension plans at December 31, 2016 and 2015
are comprised of the following (in thousands):
Plan assets measured at fair value
Commingled fixed-income funds measured at net asset
value
Commingled equity funds measured at net asset value
Alternative investments measured at net asset value
Total fair value of plan assets at end of year
$
2016
2015
753,099 $
643,987
143,018
149,065
222,351
240,453
246,075
200,353
$ 1,342,970 $ 1,255,431
Fair value methodologies for Level 1 and Level 2 are consistent with the inputs described in
Note 8.
1612-2136592
53
Cleveland Clinic Health System
Notes to Consolidated Financial Statements (continued)
15. Pensions and Other Postretirement Benefits (continued)
Fixed income securities include debt obligations of the U.S. government and various agencies,
U.S. corporations, and other fixed income instruments such as mortgage-backed and asset-backed
securities. The composition of these securities represents an expected return and risk profile that
is commensurate with broadly defined fixed income indexes such as the Barclays Capital U.S.
Aggregate Index. Additionally, investments include mutual funds and commingled fixed-income
funds that may also invest in opportunistic as well as non-U.S. and high-yield debt instruments.
Commingled fixed-income funds are valued using net asset value as a practical expedient.
Common and preferred stocks include investments of publicly traded common stocks of both U.S.
and international corporations, the majority of which represent actively traded and liquid securities
that are traded on many of the world’s major exchanges and include large-, mid-, and smallcapitalization securities. The composition of these securities represents an expected return and risk
profile that is commensurate with broadly defined equity indexes such as the Russell 3000 Index
and the Morgan Stanley Capital International (MSCI) All Country World ex-U.S. Index.
Investments also include equity mutual funds and commingled equity funds whose underlying
assets may include publicly traded equity securities. Commingled equity funds are valued using
net asset value as a practical expedient.
Alternative investments include hedge funds and private equity funds that are valued using net
asset value as a practical expedient. Hedge funds are meant to provide returns between those
expected from stocks and fixed income investments with commensurate levels of risk and lower
correlation relative to traditional investments. Included in this category are investments that are
well diversified across various strategies and may consist of absolute return funds, long/short
funds, and other opportunistic/multi-strategy funds. The underlying investments in such funds may
include publicly traded and privately held equity and debt instruments issued by U.S. and
international corporations as well as various derivatives based on these securities. Hedge fund
redemptions typically contain restrictions that allow for a portion of the withdrawal proceeds to be
held back from distribution while the underlying investments are liquidated. Private equity
investments make up a smaller portion of the alternative investments and generally consist of
limited partnerships formed to invest in equity and debt investments in operating companies that
are not publicly traded. Investment strategies in this category may include buyouts, distressed debt,
and venture capital. Private equity funds are closed-end funds and have significant redemption
restrictions that prohibit redemptions during the fund’s life.
1612-2136592
54
Cleveland Clinic Health System
Notes to Consolidated Financial Statements (continued)
16. Income Taxes
The Foundation and most of its controlled affiliates are tax-exempt organizations as described in
Section 501(c)(3) of the Internal Revenue Code. These organizations are subject to income tax on
any income from unrelated business activities. The System also owns or controls certain taxable
affiliates.
The System files income tax returns in the U.S. federal jurisdiction and in various state and foreign
jurisdictions. With few exceptions, the System is no longer subject to U.S. federal, state, and local
or non-U.S. income tax examinations by tax authorities for years before 2013.
At December 31, 2016 and 2015, the liability for uncertainty in income taxes was $2.3 million and
$4.1 million, respectively. The System does not expect a significant increase or decrease in
unrecognized tax benefits within the next 12 months. The System recognizes interest and penalties
accrued related to the liability for unrecognized tax benefits in the consolidated statements of
operations and changes in net assets.
The System has net operating losses available for federal income tax purposes of $121.5 million
at both December 31, 2016 and 2015. These losses expire in varying amounts from 2018 through
2036. A valuation allowance has been recorded for the full amount of the deferred tax asset related
to the net operating loss carryforwards due to the uncertainty regarding their use.
17. Commitments and Contingent Liabilities
The System leases various equipment and facilities under operating lease arrangements. Total
rental expense in 2016 and 2015 was $73.6 million and $63.0 million, respectively. Minimum
operating lease payments over the next five years are as follows (in thousands): 2017 – $46,069;
2018 – $39,463; 2019 –$23,346; 2020 – $18,443; and 2021 – $15,811.
Included in the System’s operating lease payments are the following off-balance-sheet financing
agreements:
In 2003, the System entered into an operating lease agreement for the purpose of leasing a
genetics and stem cell research building (Stem Cell Building Lease). Under the terms of the
Stem Cell Building Lease, the System began to lease the facility upon the issuance of the
certificate of occupancy in December 2004 and is required to lease the facility for 29 years.
At December 31, 2016, total remaining minimum operating lease payments were
$27.8 million.
1612-2136592
55
Cleveland Clinic Health System
Notes to Consolidated Financial Statements (continued)
17. Commitments and Contingent Liabilities (continued)
In 2006, the System entered into an operating lease agreement for the purpose of leasing a
parking garage and service center building (Service Center Lease). Under the terms of the
Service Center Lease, the System began to lease the facility upon issuance of a certificate of
occupancy in October 2008 and is required to lease the facility for 21 years with an option (by
the System) to extend the lease an additional five years. At December 31, 2016, total remaining
minimum operating lease payments were $75.5 million.
In 2007, the System entered into two operating lease agreements to lease an office complex
comprised of five buildings primarily used for administrative services, totaling approximately
707,000 square feet. The System is required to lease the facilities for 22 years with an option
(by the System) to extend the leases an additional five years. At December 31, 2016, total
remaining minimum operating lease payments were $39.3 million.
At December 31, 2016, the System has commitments for construction and other related capital
contracts of $422 million and letters of credit of $0.5 million. Guarantees of mortgage loans made
by banks to certain staff members are $16.6 million at December 31, 2016. In addition, the System
has remaining commitments to invest approximately $614 million in alternative investments at
December 31, 2016. The largest commitment at December 31, 2016, to any one alternative
strategy manager is $29.1 million. These investments are expected to occur over the next three to
five years. No amounts have been recorded in the consolidated balance sheets for these
commitments and guarantees.
Pledge liabilities to various foundations and other entities at December 31, 2016 are as follows
(in thousands): 2017 – $306; 2018 – $14,892; 2019 –$500; 2020 – $4,800; 2021 – $500; and
thereafter – $18,300. The unamortized discount on pledge liabilities at December 31, 2016 was
$4.9 million. Pledge liabilities are recorded in other current liabilities and other noncurrent
liabilities in the consolidated balance sheets.
1612-2136592
56
Cleveland Clinic Health System
Notes to Consolidated Financial Statements (continued)
18. Endowment
The System’s endowment consists of approximately 313 individual donor-restricted funds
established for a variety of purposes. Net assets associated with endowment funds are classified
and reported based on donor-imposed restrictions.
Interpretation of Relevant Law
In 2009, the Uniform Prudent Management of Institutional Funds Act (UPMIFA) was enacted to
update and replace Ohio’s previous law, the Uniform Management of Institutional Funds Act.
The System has interpreted UPMIFA as requiring the preservation of the fair value of the original
gift as of the gift date of the donor-restricted endowment funds, absent explicit donor stipulations
to the contrary. As a result of this interpretation, the System classifies as permanently restricted
net assets (1) the original value of gifts donated to the permanent endowment, (2) the original value
of subsequent gifts to the permanent endowment, and (3) accumulations to the permanent
endowment made in accordance with the direction of the applicable donor gift instrument at the
time the accumulation is added to the fund. The remaining portion of the donor-restricted
endowment fund that is not classified in permanently restricted net assets is classified as
temporarily restricted net assets until those amounts are appropriated for expenditure by the
System in a manner consistent with the standard for expenditure prescribed by UPMIFA.
In accordance with UPMIFA, the System considers the following factors in making a
determination to appropriate or accumulate donor-restricted endowment funds:
1.
2.
3.
4.
5.
6.
7.
The duration and preservation of the fund.
The purposes of the System and the donor-restricted endowment fund.
General economic conditions.
The possible effect of inflation and deflation.
The expected total return from income and the appreciation of investments.
Other resources of the System.
The investment policies of the System.
1612-2136592
57
Cleveland Clinic Health System
Notes to Consolidated Financial Statements (continued)
18. Endowment (continued)
Funds With Deficiencies
From time to time, the fair value of assets associated with individual donor-restricted endowment
funds may fall below the level that the donor requires the System to retain as a fund of perpetual
duration. Deficiencies of this nature that are reported in unrestricted net assets were $0.6 million
and $0.7 million as of December 31, 2016 and 2015, respectively.
Return Objectives and Risk Parameters
The System has adopted investment and spending policies for endowment assets that attempt to
provide a predictable stream of funding to programs supported by its endowment while seeking to
maintain the purchasing power of the endowment assets. Endowment assets include those assets
of donor-restricted funds that the organization must hold in perpetuity. Under this policy, the
endowment assets are invested in a highly diversified portfolio of U.S. and non-U.S. publicly
traded equities, alternative investments, and fixed income securities structured to achieve an
optimal balance between return and risk. The System expects its endowment funds, over time, to
provide an average rate of return of approximately 7.5% annually. Actual returns in any given year
may vary from this amount.
Strategies Employed for Achieving Objectives
To satisfy its long-term rate-of-return objectives, the System relies on a total return strategy in
which investment returns are achieved through both capital appreciation (realized and unrealized)
and current yield (interest and dividends). The System targets a diversified asset allocation to
achieve its long-term return objective within prudent risk constraints.
Spending Policy and How the Investment Objectives Relate to Spending Policy
The System has a policy of appropriating for distribution each year up to 5% of its endowment
fund’s average fair value over the prior three years through the calendar year-end preceding the
fiscal year in which the distribution is planned. In establishing this policy, the System considered
the long-term expected return on its endowment. Accordingly, over the long term, the System
expects the current spending policy to allow its endowment to grow at an average of 2.5% annually.
This is consistent with the System’s objective to maintain the purchasing power of the endowment
assets held in perpetuity or for a specified term as well as to provide additional real growth through
new gifts and investment return.
1612-2136592
58
Cleveland Clinic Health System
Notes to Consolidated Financial Statements (continued)
18. Endowment (continued)
Changes in Endowment Net Assets (in thousands)
Temporarily Permanently
Restricted
Restricted
Endowment net assets, January 1, 2015
$
Investment return
Net depreciation
Contributions
Appropriation of endowment
assets for expenditure
Akron General member substitution
Endowment net assets, December 31, 2015
Investment return
Net appreciation
Contributions
Appropriation of endowment
assets for expenditure
Endowment net assets, December 31, 2016 $
47,566 $
1,287
(2,281)
232,043
Total
$
–
–
25,049
–
(7,785)
(7,785)
3,218
299,097
1,245
14,521
16,979
–
3,218
260,310
–
38,787
1,245
14,521
–
–
–
16,979
(7,290)
47,263 $
–
277,289
279,609
1,287
(2,281)
25,049
$
(7,290)
324,552
19. Functional Expenses
The System provides healthcare services and education and performs research. Expenses related
to these functions were as follows (in thousands):
2016
Healthcare services
Research
Medical education
General and administrative
Non-healthcare services
1612-2136592
2015
$ 6,344,767 $ 5,337,903
210,779
220,137
290,506
333,354
755,065
894,707
82,495
104,890
$ 7,897,855 $ 6,676,748
59
Cleveland Clinic Health System
Notes to Consolidated Financial Statements (continued)
20. Special Charges
The System incurred and recorded special charges of $25.6 million and $40.9 million in 2016 and
2015, respectively. Special charges in 2016 include $7.8 million of statutory compensation costs
related to the termination of tenant leases at the System’s London building that is being converted
from office space to a healthcare facility and $17.8 million of accelerated depreciation expense
and other costs related to LHA. The Foundation, LHA and the City of Lakewood entered into an
agreement in December 2015 that outlines the transition of healthcare services in the City of
Lakewood. Participation in the agreement by the City of Lakewood was authorized by an
ordinance adopted by Lakewood City Council. Under the terms of the agreement, the Foundation
and LHA will make contributions over the next 17 years for the creation of a new health and
wellness community foundation to be used to address community health and wellness needs in the
City of Lakewood. In addition, the Foundation will construct, own and operate an approximately
62,000-square-foot family health center expected to open in 2018 that will be located adjacent to
the current site of the hospital. LHA ceased inpatient operations at the hospital in February 2016,
while the current emergency department and several outpatient services at the hospital will
continue until the opening of the new family health center and emergency department.
The cessation of inpatient services at the hospital is not considered a discontinued operation since
the System provides inpatient hospital services at the Foundation and its subsidiary hospitals in
the Northeast Ohio area. Special charges in 2015 include $33.7 million of pledge liabilities in
connection with the agreement, $13.3 million of accelerated depreciation and other property, plant
and equipment costs, $0.8 million in employee retention costs, offset by a $6.9 million gain related
to changes in the terms of the lease between the City of Lakewood and LHA.
21. Subsequent Events
The System evaluated events and transactions occurring subsequent to December 31, 2016 through
March 21, 2017, the date the consolidated financial statements were issued. During this period,
there were no subsequent events requiring recognition in the consolidated financial statements,
and there were no nonrecognized subsequent events requiring disclosure.
1612-2136592
60
Supplementary Information
1612-2136592
Ernst & Young LLP
Suite 1800
950 Main Avenue
Cleveland, OH 44113-7214
Tel: +1 216 861 5000
Fax: +1 216 583 2013
ey.com
Report of Independent Auditors on
Supplementary Information
The Board of Directors
The Cleveland Clinic Foundation
Our audits were conducted for the purpose of forming an opinion on the consolidated financial
statements as a whole. The following consolidating balance sheets, statements of operations and
changes in net assets, and statements of cash flows are presented for purposes of additional analysis
and are not a required part of the consolidated financial statements. Such information is the
responsibility of management and was derived from and relates directly to the underlying
accounting and other records used to prepare the consolidated financial statements.
The information has been subjected to the auditing procedures applied in the audits of the
consolidated financial statements and certain additional procedures, including comparing and
reconciling such information directly to the underlying accounting and other records used to
prepare the consolidated financial statements or to the consolidated financial statements
themselves, and other additional procedures in accordance with auditing standards generally
accepted in the United States. In our opinion, the information is fairly stated in all material respects
in relation to the consolidated financial statements as a whole.

March 21, 2017
1612-2136592
A member firm of Ernst & Young Global Limited
61
Cleveland Clinic Health System
Consolidating Balance Sheet
December 31, 2016
(In Thousands)
Obligated
Group
Assets
Current assets:
Cash and cash equivalents
Patient receivables, net
Due from affiliates
Investments for current use
Other current assets
Total current assets
Investments:
Long-term investments
Funds held by trustees
Assets held for self-insurance
Donor-restricted assets
Property, plant, and equipment, net
Other assets:
Pledges receivable, net
Trusts and interests in foundations
Other noncurrent assets
Total assets
62
$
511,102
976,060
4,091
–
313,911
1,805,164
Consolidating
Non-Obligated Adjustments
Group
and Eliminations Consolidated
$
9,526
109,412
28
52,126
85,292
256,384
$
–
(26,301)
(4,119)
–
(2,311)
(32,731)
$
520,628
1,059,171
–
52,126
396,892
2,028,817
6,090,613
75,892
–
572,982
6,739,487
385,646
–
128,128
39,239
553,013
–
–
–
–
–
6,476,259
75,892
128,128
612,221
7,292,500
3,478,405
1,033,673
–
4,512,078
149,889
59,069
514,693
723,651
820
8,150
51,138
60,108
$ 12,746,707
$ 1,903,178
$
–
–
(155,824)
(155,824)
150,709
67,219
410,007
627,935
(188,555)
$ 14,461,330
1612-2136592
Obligated
Group
Liabilities and net assets
Current liabilities:
Accounts payable
Compensation and amounts
withheld from payroll
Current portion of long-term debt
Variable rate debt classified as current
Due to affiliates
Other current liabilities
Total current liabilities
Long-term debt:
Hospital revenue bonds
Notes payable and capital leases
Other liabilities:
Professional and general liability
insurance reserves
Accrued retirement benefits
Other noncurrent liabilities
Total liabilities
Net assets:
Unrestricted
Temporarily restricted
Permanently restricted
Total net assets
Total liabilities and net assets
$
398,704
Consolidating
Non-Obligated Adjustments
Group
and Eliminations Consolidated
$
86,033
$
(2,310)
$
482,427
289,650
75,918
466,203
28
388,183
1,618,686
32,843
5,893
60,912
4,091
100,680
290,452
–
(72)
–
(4,119)
(26,302)
(32,803)
322,493
81,739
527,115
–
462,561
1,876,335
2,926,949
121,896
3,048,845
–
547,127
547,127
–
(152,304)
(152,304)
2,926,949
516,719
3,443,668
57,290
429,965
434,093
921,348
5,588,879
88,819
48,909
56,452
194,180
1,031,759
–
–
–
–
(185,107)
146,109
478,874
490,545
1,115,528
6,435,531
6,267,797
597,449
292,582
7,157,828
$ 12,746,707
823,860
29,977
17,582
871,419
$ 1,903,178
(3,448)
–
–
(3,448)
(188,555)
7,088,209
627,426
310,164
8,025,799
$ 14,461,330
$
See accompanying note.
1612-2136592
63
Cleveland Clinic Health System
Consolidating Balance Sheet
December 31, 2015
(In Thousands)
Obligated
Group
Assets
Current assets:
Cash and cash equivalents
Patient receivables, net
Due from affiliates
Investments for current use
Other current assets
Total current assets
Investments:
Long-term investments
Funds held by trustees
Assets held for self-insurance
Donor-restricted assets
Property, plant, and equipment, net
Other assets:
Pledges receivable, net
Trusts and interests in foundations
Other noncurrent assets
Total assets
64
$
176,869
879,420
916
–
343,901
1,401,106
Consolidating
Non-Obligated Adjustments
Group
and Eliminations Consolidated
$
72,711
94,544
40
53,852
66,682
287,829
$
–
(23,660)
(956)
–
(2,444)
(27,060)
$
249,580
950,304
–
53,852
408,139
1,661,875
5,813,363
116,046
–
520,474
6,449,883
371,015
9,677
93,662
44,687
519,041
–
–
–
–
–
6,184,378
125,723
93,662
565,161
6,968,924
3,384,312
1,004,355
–
4,388,667
140,137
77,416
325,545
543,098
1,331
9,325
81,257
91,913
$ 11,778,399
$ 1,903,138
$
–
–
(53,051)
(53,051)
141,468
86,741
353,751
581,960
(80,111)
$ 13,601,426
1612-2136592
Obligated
Group
Liabilities and net assets
Current liabilities:
Accounts payable
Compensation and amounts
withheld from payroll
Current portion of long-term debt
Variable rate debt classified as current
Due to affiliates
Other current liabilities
Total current liabilities
Long-term debt:
Hospital revenue bonds
Notes payable and capital leases
Other liabilities:
Professional and general liability
insurance reserves
Accrued retirement benefits
Other noncurrent liabilities
Total liabilities
Net assets:
Unrestricted
Temporarily restricted
Permanently restricted
Total net assets
Total liabilities and net assets
$
345,228
Consolidating
Non-Obligated Adjustments
Group
and Eliminations Consolidated
$
69,508
$
(2,177)
$
412,559
253,615
84,392
370,375
27
379,854
1,433,491
42,053
11,302
148,877
929
111,115
383,784
–
–
–
(956)
(23,927)
(27,060)
295,668
95,694
519,252
–
467,042
1,790,215
2,669,251
95,327
2,764,578
58,220
420,296
478,516
–
(49,603)
(49,603)
2,727,471
466,020
3,193,491
52,587
426,180
425,155
903,922
5,101,991
87,030
64,573
53,197
204,800
1,067,100
–
–
–
–
(76,663)
139,617
490,753
478,352
1,108,722
6,092,428
5,851,045
548,408
276,955
6,676,408
$ 11,778,399
779,809
37,868
18,361
836,038
$ 1,903,138
(3,448)
–
–
(3,448)
(80,111)
6,627,406
586,276
295,316
7,508,998
$ 13,601,426
$
See accompanying note.
1612-2136592
65
Cleveland Clinic Health System
Consolidating Statements of Operations and
Changes in Net Assets
Year Ended December 31, 2016
(In Thousands)
Operations
Obligated
Group
Unrestricted revenues
Net patient service revenue
Provision for uncollectible accounts
Net patient service revenue less
provision for uncollectible accounts
Other
Total unrestricted revenues
$ 6,882,932
(263,790)
Consolidating
Non-Obligated Adjustments
Group
and Eliminations Consolidated
$
928,179
(37,904)
$
(260,045)
–
$ 7,551,066
(301,694)
6,619,142
641,752
7,260,894
890,275
308,593
1,198,868
(260,045)
(162,510)
(422,555)
7,249,372
787,835
8,037,207
4,218,025
644,499
791,670
408,293
154,624
276,150
67,624
6,560,885
589,056
105,605
71,027
140,622
68,946
72,148
74,093
1,121,497
(272,212)
(1,031)
–
(42,808)
(26,612)
(4,921)
(74,971)
(422,555)
4,534,869
749,073
862,697
506,107
196,958
343,377
66,746
7,259,827
Operating income before interest,
depreciation, and amortization
expenses
700,009
77,371
–
777,380
Interest
Depreciation and amortization
Operating income (loss) before special charges
Special charges
Operating income (loss)
126,401
402,420
171,188
968
170,220
9,704
73,885
(6,218)
24,650
(30,868)
–
–
–
–
–
136,105
476,305
164,970
25,618
139,352
Nonoperating gains and losses
Investment return
Derivative losses
Other, net
Net nonoperating gains
Excess (deficiency) of revenues over expenses
375,676
(20,130)
94
355,640
525,860
28,515
(2,694)
(7,306)
18,515
(12,353)
–
–
–
–
–
404,191
(22,824)
(7,212)
374,155
513,507
Expenses
Salaries, wages, and benefits
Supplies
Pharmaceuticals
Purchased services and other fees
Administrative services
Facilities
Insurance
1612-2136592
66
Cleveland Clinic Health System
Consolidating Statements of Operations and
Changes in Net Assets
Year Ended December 31, 2015
(In Thousands)
Operations
Obligated
Group
Unrestricted revenues
Net patient service revenue
Provision for uncollectible accounts
Net patient service revenue less
provision for uncollectible accounts
Other
Total unrestricted revenues
Expenses
Salaries, wages, and benefits
Supplies
Pharmaceuticals
Purchased services and other fees
Administrative services
Facilities
Insurance
Operating income before interest,
depreciation, and amortization
expenses
Interest
Depreciation and amortization
Operating income (loss) before special charges
Special charges
Operating income (loss)
Nonoperating gains and losses
Investment return
Derivative losses
Gain on remeasurement of Akron General
equity investment
Akron General member substitution
Goodwill impairment loss
Other, net
Net nonoperating (losses) gains
Excess of revenues over expenses
1612-2136592
$ 6,557,092
(216,960)
Consolidating
Non-Obligated Adjustments
Group
and Eliminations Consolidated
$
350,239
(14,344)
$
(194,848)
–
$ 6,712,483
(231,304)
6,340,132
572,069
6,912,201
335,895
238,172
574,067
(194,848)
(134,448)
(329,296)
6,481,179
675,793
7,156,972
3,753,065
611,439
677,496
370,608
127,155
271,167
59,798
5,870,728
276,086
54,397
23,740
40,078
74,694
35,174
56,626
560,795
(229,937)
(990)
–
(12,308)
(26,015)
(5,689)
(54,357)
(329,296)
3,799,214
664,846
701,236
398,378
175,834
300,652
62,067
6,102,227
1,041,473
13,272
–
1,054,745
120,318
380,440
540,715
8,701
532,014
3,823
29,013
(19,564)
32,226
(51,790)
–
–
–
–
–
124,141
409,453
521,151
40,927
480,224
(48,924)
(22,325)
(7,404)
(2,685)
–
–
(56,328)
(25,010)
38,777
–
–
477
(31,995)
500,019
–
242,822
(63,060)
316
169,989
118,199
–
–
–
–
–
–
38,777
242,822
(63,060)
793
137,994
618,218
67
Cleveland Clinic Health System
Consolidating Statements of Operations and
Changes in Net Assets (continued)
(In Thousands)
Obligated
Group
Total net assets at January 1, 2015
Excess of revenues over expenses
Donated capital, excluding assets released from
restrictions for capital purposes of $5,760
Restricted gifts and bequests
Restricted net investment (loss) income
Net assets released from restrictions used for
operations included in other unrestricted revenues
Retirement benefits adjustment
Transfers (to) from affiliates
Change in restricted net assets related
to interest in foundations
Change in restricted net assets related
to value of perpetual trusts
Net change in unrealized losses
on nontrading investments
Akron General member substitution contribution
of restricted net assets
Other
Increase in total net assets
Total net assets at December 31, 2015
Excess (deficiency) of revenues over expenses
Donated capital, excluding assets released from
restrictions for capital purposes of $22,683
Restricted gifts and bequests
Restricted net investment income
Net assets released from restrictions used for
operations included in other unrestricted revenues
Retirement benefits adjustment
Transfers (to) from affiliates
Change in restricted net assets related
to interest in foundations
Change in restricted net assets related
to value of perpetual trusts
Foreign currency translation loss
Net change in unrealized gains
on nontrading investments
Other
Increase in total net assets
Total net assets at December 31, 2016
$
6,273,610
500,019
Non-Obligated
Group
$
46
132,253
(972)
$
–
368
240
(3,448)
–
Consolidated
$
6,802,495
618,218
–
–
–
46
132,621
(732)
(38,438)
25,546
(207,971)
(6,055)
(3,799)
207,971
–
–
–
(44,493)
21,747
–
(1,478)
(33,353)
–
(34,831)
(480)
(196)
–
(676)
–
(4,947)
(4,947)
–
–
(780)
402,798
6,676,408
525,860
31,674
(11,344)
303,705
836,038
(12,353)
724
97,207
22,755
(4,397)
(10,954)
116,453
432
–
(1,318)
(73)
320
(304)
481,420
7,157,828
–
–
–
(3,448)
–
41
3,988
1,696
(40,895)
(6,835)
(116,453)
$
532,333
118,199
Consolidating
Adjustments
and Eliminations
$
–
–
–
765
101,195
24,451
–
–
–
(45,292)
(17,789)
–
–
(773)
(59,108)
–
788
35,381
871,419
31,674
(12,124)
706,503
7,508,998
513,507
432
–
–
$
–
–
–
(3,448)
(2,091)
(59,181)
$
320
484
516,801
8,025,799
See accompanying note.
1612-2136592
68
Cleveland Clinic Health System
Consolidating Statement of Cash Flows
Year Ended December 31, 2016
(In Thousands)
Obligated
Group
Operating activities and net nonoperating gains and losses
Increase in total net assets
Adjustments to reconcile increase in total net assets
to net cash provided by operating activities and
net nonoperating gains and losses:
Loss on extinguishment of debt
Retirement benefits adjustment
Net realized and unrealized gains on investments
Depreciation and amortization
Provision for uncollectible accounts
Foreign currency translation loss
Donated capital
Restricted gifts, bequests, investment income, and other
Transfers to (from) affiliates
Amortization of bond premiums and debt issuance costs
Net gain in value of derivatives
Changes in operating assets and liabilities:
Patient receivables
Other current assets
Other noncurrent assets
Accounts payable and other current liabilities
Other liabilities
Net cash provided by operating activities and net
nonoperating gains and losses
$
Financing activities
Proceeds from long-term borrowings
Payments for advance refunding and redemption of long-term debt
Principal payments on long-term debt
Debt issuance costs
Change in pledges receivables, trusts and interests in foundations
Restricted gifts, bequests, investment income, and other
Net cash provided by (used in) financing activities
Investing activities
Expenditures for property and equipment
Proceeds from sale of property and equipment
Net change in cash equivalents reported in long-term investments
Purchases of investments
Sales of investments
Transfers (to) from affiliates
Net cash used in investing activities
Effect of exchange rate changes on cash
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
$
481,420
Consolidating
Non-Obligated
Adjustments
Group
and Eliminations
$
35,381
$
–
Consolidated
$
–
6,835
(356,893)
402,420
263,790
73
(724)
(119,076)
116,453
(1,670)
(1,954)
3,925
10,954
(25,253)
88,872
37,904
59,108
(41)
(4,911)
(116,453)
13
(6,881)
(360,430)
46,920
(191,171)
94,448
23,621
(52,772)
(18,837)
29,839
3,147
(14,693)
2,641
3,030
102,773
(5,671)
–
(410,561)
31,113
(58,559)
91,924
8,928
404,062
29,302
102,773
536,137
502,370
–
(143,228)
(949)
(11,510)
119,076
465,759
145,711
(148,260)
(26,643)
–
1,307
4,911
(22,974)
(145,633)
–
42,860
–
–
–
(102,773)
502,448
(148,260)
(127,011)
(949)
(10,203)
123,987
340,012
(487,936)
1,585
91,241
(2,375,754)
2,351,802
(116,453)
(535,515)
(176,767)
–
54,823
(381,917)
320,101
116,453
(67,307)
(73)
334,233
176,869
511,102 $
(2,206)
(63,185)
72,711
9,526 $
–
–
–
–
–
–
–
–
–
–
–
516,801
3,925
17,789
(382,146)
491,292
301,694
59,181
(765)
(123,987)
–
(1,657)
(8,835)
–
–
–
–
–
–
–
(664,703)
1,585
146,064
(2,757,671)
2,671,903
–
(602,822)
–
–
–
–
(2,279)
271,048
249,580
520,628
$
See accompanying note.
1612-2136592
69
Cleveland Clinic Health System
Consolidating Statement of Cash Flows
Year Ended December 31, 2015
(In Thousands)
Obligated
Group
Operating activities and net nonoperating gains and losses
Increase in total net assets
Adjustments to reconcile increase in total net assets
to net cash provided by operating activities and
net nonoperating gains and losses:
Loss on extinguishment of debt
Retirement benefits adjustment
Net realized and unrealized losses on investments
Depreciation and amortization
Provision for uncollectible accounts
Gain on change in terms of long-term lease
Donated capital
Restricted gifts, bequests, investment income, and other
Transfers to (from) affiliates
Amortization of bond premiums and debt issuance costs
Net loss (gain) in value of derivatives
Goodwill impairment loss
Gain on remeasurement of Akron General equity investment
Akron General member substitution contribution
Changes in operating assets and liabilities:
Patient receivables
Other current assets
Other noncurrent assets
Accounts payable and other current liabilities
Other liabilities
Net cash provided by operating activities and net
nonoperating gains and losses
$
402,798
Consolidating
Non-Obligated
Adjustments
Group
and Eliminations
$
303,705
$
–
Consolidated
$
209
(25,546)
87,709
380,440
216,960
–
(46)
(129,323)
207,971
(2,533)
57
–
(38,777)
–
–
3,799
10,107
38,450
14,344
(6,856)
–
32,941
(207,971)
(19)
(615)
63,060
–
(274,496)
(289,295)
(37,760)
(81,420)
15,025
(14,922)
(10,036)
5,091
27,953
20,902
11,427
(608)
(16,101)
(24,114)
(109)
–
(299,939)
(48,770)
(77,581)
35,818
(3,495)
691,547
31,786
(40,932)
682,401
Financing activities
Proceeds from long-term borrowings
Principal payments on long-term debt
Debt issuance costs
Change in pledges receivables, trusts and interests in foundations
Restricted gifts, bequests, investment income, and other
Net cash provided by financing activities
–
(109,280)
–
23,980
129,323
44,023
378,777
(6,502)
(89)
39,580
(32,941)
378,825
(3,777)
44,709
–
–
–
40,932
375,000
(71,073)
(89)
63,560
96,382
463,780
Investing activities
Expenditures for property and equipment
Proceeds from sale of property and equipment
Cash acquired through member substitution
Acquisition of business, net of cash acquired
Net change in cash equivalents reported in long-term investments
Purchases of investments
Sales of investments
Transfers (to) from affiliates
Net cash used in investing activities
(380,380)
183
–
–
327,466
(2,534,242)
2,085,486
(60,166)
(561,653)
(73,156)
987
15,367
(420,144)
(21,891)
(294,432)
327,833
60,166
(405,270)
–
–
–
–
–
–
–
–
–
5,341
67,370
72,711
–
–
–
Increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
$
173,917
2,952
176,869
$
–
–
–
–
–
–
–
–
–
–
–
–
–
–
706,503
$
209
(21,747)
97,816
418,890
231,304
(6,856)
(46)
(96,382)
–
(2,552)
(558)
63,060
(38,777)
(274,496)
(453,536)
1,170
15,367
(420,144)
305,575
(2,828,674)
2,413,319
–
(966,923)
$
179,258
70,322
249,580
See accompanying note.
1612-2136592
70
Cleveland Clinic Health System
Note to Consolidating Financial Statements
December 31, 2016 and 2015
1. Presentation of Consolidating Financial Statements
The accompanying financial statement information presents consolidating financial statement
information for the Obligated Group (as defined herein) and certain controlled affiliates of
The Cleveland Clinic Foundation (collectively referred to as the Non-Obligated Group), which
have no liability under the Master Trust Indenture (Indenture), amended and restated as of April 1,
2003 (as supplemented, the Indenture), between The Cleveland Clinic Foundation and
The Huntington National Bank, as successor Master Trustee. The Cleveland Clinic Foundation,
Cleveland Clinic Health System – East Region, Fairview Hospital, Lutheran Hospital, Marymount
Hospital, Inc., Medina Hospital, Cleveland Clinic Florida (a nonprofit corporation) and Cleveland
Clinic Florida Health System Nonprofit Corporation are the sole members of the Obligated Group
under the Indenture.
With respect to the Obligated Group, certain properties and interests are considered to be Excluded
Property under the Indenture. In addition, the provisions of the Indenture provide that additional
property may be categorized as Excluded Property upon satisfaction of various financial tests.
As such, these properties and interests are not subject to the restrictions contained in the Indenture
and, under the Indenture, are not subject to the restriction on liens and other encumbrances that
may be placed on property of the Obligated Group. Furthermore, the revenues derived from the
Excluded Property are not subject to the restrictions contained in the Indenture until they are
received and commingled with other revenues of the Obligated Group. The accompanying
financial statement information is presented by legal entity and no adjustment has been made for
the Excluded Property.
1612-2136592
71
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